In August 2010, an article in Bloomberg Businessweek reported: "Facing a (Swiss) franc surge that threatened to derail the economy, the Swiss National Bank (SNB) has quadrupled its foreign exchange holdings since March 2009 to slow the currency's advance and protect exporters."
The Swiss National Bank had been particularly concerned with the appreciation of the franc against the euro, with the exchange rate having risen from more than 1.5 francs to the euro in November 2009 to 1.3 francs to the euro in August 2010.
a. How would slowing the Swiss franc's advance-that is, its appreciation-protect exporters?
b. How would the quadrupling of the Swiss National Bank's foreign exchange holdings affect the demand and supply for Swiss francs and the exchange rate between the franc and the euro? Use a graph to illustrate your answer.
c. The article cited here went on to state: "The new quandary for the central bank is when to start raising borrowing costs. While keeping the benchmark interest rate at the current level of 0.25 percent for too long may spark domestic inflation, increasing it may . . . hurt exporters." Why would increasing the benchmark interest rate hurt Swiss exporters?