Explain the effect of their monetary policies on the exchange rate with diagram.
From January 1 to September 1, 2008, the Federal Reserve pushed down its target for the federal funds rate by 225 basis points. During this same period, the Hong Kong Monetary Authority also pushed down its interest rate target by 225 basis points. On the other hand, other central banks in emerging Asia- including the central banks of South Korea, India, Taiwan, Indonesia, Thailand, and the Philippines-all pushed up their interest rate targets.
1. Explain what accounts for the Hong Kong Monetary Authority behaving differently than the other central banks in emerging Asia.
2. Now consider the other central banks in emerging Asia, which is, those other than Hong Kong. With the help of a graph of the foreign exchange market, explain the effect of their monetary policies on the exchange rate, where e represents the US dollar price of an index of emerging Asia currencies.