Problem:
i) Consider the following apparently contradictory statements:
a) ‘ an increase in the rate of growth in a country's national income relative to that in the rest of the world will result in a depreciation of that country'
b) ‘ an increase in the rate of growth in a country's national income relative to that in the rest of the world will result in a appreciation of that country'
Outline the mechanisms through which forecasters responsible for the above comments see the change in national income affecting the FX markets. Is it possible to deem one or the other of the forecasters to be correct? If so, explain the procedure that you would adopt in determining which of the two is correct.
ii) If the central bank wishes to influence the value of the currency under a floating exchange rate regime, it may attempt to do so through direct intervention in the FX market. Identify three methods that a central bank may use. Explain how a central bank might implement each of these methods.