Exchange rates

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An appreciation in the pound sterling by a country can make its exports to be more expensive thereby leading to a decrease in the volume of exports and aggregate demand. The government of these countries should therefore appreciate the exchange rate to provide their firms with an incentive to keep costs as low as possible in order to be in a good position in the global market. The government should recognize that a stronger pound probably leads to reduction in import prices making firm’s raw materials and component to be cheap.

An increase in the value of the exchange rate can only be realized if the government decides to increase the interest rates. The government should also purchase the sterling pound via central Bank intervention in the foreign exchange markets. The central banks in these countries for example the U. S Federal reserve should set high interest rate to slow the growth of money supply. This method will lead to reduction in inflation. Temporary controls may complement a recession as a way to fight inflation. Applying temporary controls will make the recession more efficient as a way to fight inflation.

The government should try to device strategies to liberalize prices but not imposing price control. The Chinese government should come up with a price freezing policy to control inflation to prevent further economic detriment. China is one of the countries that has enjoyed as extreme economic growth trend over the last few years. The inflation rise in the country has increased to 6. 5% from 5. 6% in the previous month. It is therefore estimated that in the next year the problem of inflation will be a national disaster to the economy (George, 1990).

The Chinese government should therefore ensure that the interest rate is charged highly and increase in the cash reserve ratio. This will lead to a freeze in prices. The government needs to increase the prices of essential products with an aim of controlling inflation. If inflation is not addressed inflation will be the biggest threat to the near future of the economy and its health. Recommendation Inflation has been a worldwide problem and most of the governments across the world have to address it jointly.

This is because one country may decide to control it but the other might tend to thwart the efforts of the other country. Inflation not only ends the real incomes of those who are employed permanently at fixed wages but it also weakens the strength of a country’s economy. An inflation rate going beyond five percent may land a country into a hot soup however a small rate like one to two percent may be tolerable. Inflation can threaten all the economic gains a country has made thus leading to a general decrease in the economy growth of that particular country.

In the past decade the annual rate of inflation rate in the United States has averaged from 6-6. 5% (William and Alan, 2006). Inflation has therefore been regarded as a serious problem in many countries since time immemorial. Many countries have tried to control it but the efforts put up to date have never been successful. It therefore means that the government should employ a combined effort by involving all the economic sectors in the country to participate in the sweeping away of this problem.

If it is not fought together then the country’s national productivity will suffer and the value of the dollar will continue to fall in world trade. Not only china has been bothered by the problem, but also United States, Gemanyand India. In china consumer prices in the first eight months of 2006 rose from 4. 8%, which was brought, by high fuel prices and interest rate driven high production costs to 7. 5% and in India the rate of inflation was around 17% by 1991 and 7% by 1993 (David, 1995).

The problem of inflation should therefore be raised and addressed by these countries. For example an increase in interest rate and credit curbs would lead to a decline in growth rates. Higher interest rate will also add the cost of production when loans are taken by the business. It can be said that in these countries, the government and central bank do not discuss the various ways of controlling inflation. Proper policies should be put into place by the government of these countries to address the issue.

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