short essays Currency exchange stability is an important goal of the Saudi Minis

Question

short essays Currency exchange stability is an important goal of the Saudi Ministry of Commerce and Industry. 1. What are the advantages of currency exchange stability for Saudi Arabia? Explain with examples. 2. What are the disadvantages of currency exchange stability for Saudi Arabia? Explain with examples. 3. How does Saudi Arabia maintain currency exchange stability? Explain with examples. The political independence of central banks is an increasingly important issue in the global economy. 1. What is the global trend in the political independence of central banks? 2. Is this good or bad for the global economy? Explain with examples. 3. What are the advantages and disadvantages to individual countries? Explain with examples.

Explanation / Answer

Part 2

1) One solution to the problem of dynamic inconsistency is to require that the central bank follows a monetary rule, for instance, to increase the money supply at a low, constant rate. However, because the monetary rule may be wrong and because there are good reasons for monetary policy to respond to some shocks, such as a supply shock, no country has adopted a rigid form of rule.

2)Another solution to the inflationary bias of discretionary policy is to set up a central bank that is independent of the electoral cycle and that has a clear mandate to fight inflation. The Fed is in principle independent of the administration, though it does report to Congress. In Germany, the central bank, the Bundesbank, was fiercely independent and a fierce inflation fighter. As 12 European countries, including Germany, have given up their currencies and created a new currency, the euro, the Bundesbank no longer makes monetary policy. That is done by the European central bank, which is very independent. There is strong empirical evidence showing that the more independent the central bank, the lower the inflation rate in a country.

3) The question of the optimal degree of independence of the central bank is a complicated one. There are short-run tradeoffs, and there is always a question of just how fast a central bank should try to reduce inflation. Thus, central banks end up exercising judgment, which ultimately depends on their evaluation of what the public's real interests are. But there is no way of knowing what those interests are without some democratic input. Whenever the Fed shows its independence, typically by refusing to expand as fast as the administration or Congress wants, there are calls to clip its wings. This is one way the Fed gets the message.

Part 1

1) It was clear enough in the case of world war II that a high level of defense expenditures would be required for some years. However, in the case of the OPEC oil embargo of 1973-74 , it was not at all clear how long the embargo would last or whether the high prices for oil that were established in late 1973 would persist.At the time, there were many who argued that the oild cartel would not survive and that oil prices would soon fall i.e. that the disturbance was temporary. This all turned out to be 12 years. Yet there was profit for Saudi Arabia.

2. There were delays , or lags, in the monetary policy, an inside lag, which is the time period it takes to undergo a policy action, such as tax cut or an increase in the money supply- and an outside lag, which describes the timing of the effects of the policy action on the economy. The inside lag, in turn, is divided into recognition, decision, and action lags.

3. Saudi arabia tackled the problem by imposing tax cuts, and applying a new monetary policy which increased supply.

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