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IMF, floating exchange rate, transnational strategy

1. Why might the IMF be called the "lender of last resort"? What are three of the tools they use for establishing economic stability in a country?

2. Which is more conducive to international trade, the fixed or the floating exchange rate? Why?

3. Choose one of the World Bank's present projects (from the website) and tell how it will benefit international trade.

4. Country A has a stable currency and does substantial business with country B. The following is a history of recent exchange rates, given country A's rate is a constant 1:

Date Country B Exchange

April 1 240:1

May 1 255:1

June 1 310: 1

July 1 315: 1

What is happening here? How will a company in Country A purchase products from a company in Country B if it takes three months for the order to go through?

5. Explain why and how a company would shift from Localization strategy to Transnational Strategy. Give an example even if you have to make it up.

Solution Preview

1. Why might the IMF be called the "lender of last resort"? What are three of the tools they use for establishing economic stability in a country?

Recent financial crises have led to renewed interest in having an international lender of last resort (Giannini, 1999).
To avert any financial and economic instability, there must be an entity with the resources and capability ready to lend and assist any country in times of monetary needs. The IMF was founded to serve that purpose.

The central bank is called the lender of last resort because it is capable of lending and to prevent failures of solvent banks must lend--in periods when no other lender is either capable of lending or willing to lend in sufficient volume to prevent or end a financial panic (Fischer, 1999).

The three tools are: a.) Surveillance - The IMF promotes economic stability and global growth by encouraging countries to adopt sound economic and financial policies; b.) Technical assistance and training, it offers technical assistance and training to help member countries strengthen their capacity to design and implement effective policies; and c.) Lending - it provides member countries the breathing room they need to correct balance of payments problems (IMF.org, n.d.).

2. Which is more conducive to international trade, the fixed or the floating exchange rate? Why?

In a world of dynamic interplay of economic forces in the international market, exchange rate must be flexible enough to cater to these changes. A floating exchange rate is the most favorable than the fixed rate.

The same belief was embraced by Heakal (2012) when he suggested that "although the ...

Solution Summary

The solution discusses why IMF is called the lender of last resort. Other discussions focus on fixed and floating exchange rate, localization strategy and transnational strategy.

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