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Stabilizing financial systems

Details: You have been tasked to brief the firm's finance team on an aspect of international finance and then to lead a discussion with the team.

This briefing is particularly important because of the global financial crisis that began in 2007.
The briefing is needed to provide more foundation for the finance team because they are not well versed in the international aspects of finance.

Provide a briefing that addresses the following:

Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.
What did the central banks do to stabilize the financial systems in 2007-2009?
In an effort to stabilize the financial system how much money, in U.S. dollar equivalent and as a percentage of the country's GDP, did the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009?
How well did each country's efforts work at stabilizing the economy?
What appears to be the major constraint that the central banks used to determine the limits of the monetary injections into the economy? Did the United States use the same or different criteria?
To what extent to do you agree/disagree with the actions of the central banks during this time?

Solution Preview

Provide a briefing that addresses the following:

Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.
Central Bank regulates monetary policy. There are three tools of monetary policy: open market operations, changes in reserve requirements, and changes in the discount rate. Central bank can expand the money supply by:
- Reducing the discount rate
- Reduction in reserves requirements
- Purchasing the Bonds
Central bank can contract the money supply by:
- Increasing the discount rate
- Increasing reserves requirements
- Selling the Bonds

(Cliffnotes, 2009)

Buying of currency
Central Banks may buy currency to influence the money supply. Some central banks may require that some or all foreign exchange receipts (generally from exports) be exchanged for the local currency. The rate that is used to purchase local currency may be market-based or arbitrarily set by the bank. This tool is generally used in countries with non-convertible currencies or partially-convertible currencies. The recipient of the local currency may be allowed to freely dispose of the funds, required to hold the funds with the central bank for some period of time, or allowed to use the funds subject to certain restrictions. In other cases, the ability to hold or use the foreign exchange may be otherwise limited.

In this method, money supply is increased by the central bank when it purchases the foreign currency by issuing (selling) the ...

Solution Summary

This response helps in explaining the measures to stabilize financial systems.

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