https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extr
ID: 1118233 • Letter: H
Question
https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extras/extra5.htmWhy without speculators, markets would tend to be relatively “less stable”? In addition, Friedman states: “However, when you have the kind of pegged exchange rate situation we were talking about, there's an invitation for speculators, because they're given a one way ride. They can't lose because the government is a counter-party and what happens is that speculators can make money because the government is going to lose money.” What does Friedman mean by “government going to lose money” and thus speculators being attracted to speculate even more? Explain more clearly departing from his implied/stated insights. [Maximum 5 reasonably concise sentences are allowed in your answer
Please TYPE the answer here , not hand written . Thank you https://web.archive.org/web/19991018220901/http:/www.abc.net.au/money/vault/extras/extra5.htm
Why without speculators, markets would tend to be relatively “less stable”? In addition, Friedman states: “However, when you have the kind of pegged exchange rate situation we were talking about, there's an invitation for speculators, because they're given a one way ride. They can't lose because the government is a counter-party and what happens is that speculators can make money because the government is going to lose money.” What does Friedman mean by “government going to lose money” and thus speculators being attracted to speculate even more? Explain more clearly departing from his implied/stated insights. [Maximum 5 reasonably concise sentences are allowed in your answer
Please TYPE the answer here , not hand written . Thank you
Why without speculators, markets would tend to be relatively “less stable”? In addition, Friedman states: “However, when you have the kind of pegged exchange rate situation we were talking about, there's an invitation for speculators, because they're given a one way ride. They can't lose because the government is a counter-party and what happens is that speculators can make money because the government is going to lose money.” What does Friedman mean by “government going to lose money” and thus speculators being attracted to speculate even more? Explain more clearly departing from his implied/stated insights. [Maximum 5 reasonably concise sentences are allowed in your answer Why without speculators, markets would tend to be relatively “less stable”? In addition, Friedman states: “However, when you have the kind of pegged exchange rate situation we were talking about, there's an invitation for speculators, because they're given a one way ride. They can't lose because the government is a counter-party and what happens is that speculators can make money because the government is going to lose money.” What does Friedman mean by “government going to lose money” and thus speculators being attracted to speculate even more? Explain more clearly departing from his implied/stated insights. [Maximum 5 reasonably concise sentences are allowed in your answer
Please TYPE the answer here , not hand written . Thank you
Explanation / Answer
It means that when the currency is pegged, the speculators know that the government or in this case the central bank will use its forex reserves to save the currency from declining. Therefore, they have even more incentive to force the central bank to protect the currency. This makes the market even more volatile.
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