International finance Assignment Example | Topics and Well Written Essays - 500 words - 1

International finance - Assignment Example This could lead to reduced investments of the government or organizations involved in the debt, thus leading to adoption of compensatory mechanisms such as increased taxation by governments and increased product prices by organizations in order to cater for the cost. On the other hand, devaluation is likely to discourage investors from foreign countries, as governments that devalue their currency are perceived as weak. This would lead to decreased revenue and thus high rates of inflation. An increase in national income in Japan as compared to the US, with floating rates of exchange would lead to the depreciation of the rate of current exchange for Japan, and thus appreciation of the US dollar. An increase in the prices in both Japan and the US would ensure that the two countries maintain their purchasing power parity. As such, the US dollar would remain the same relative to the Japanese yen. High real interest rates in Japan would lead to appreciation in the value of their currency and subsequent depreciation in the value of the US dollar. As such, global investors would wish to hold financials in the Japanese yen. For them to buy Japanese stocks or bonds, the Japanese yen must be bought, causing it to appreciate. The fixed exchange rate system guards countries from exchange rate uncertainties by allowing countries that experience deficits in the payment balance to use their dollar reserves to finance such deficits (Arnold 891). With the decline in the number of dollars, the supply of money in the country is reduced. The interest rates thus increase in response to the reduced prices. The reduction in price results in the goods of the nation becoming more competitive at the international level, increasing capital flow into the nation. As such, the fixed exchange rate system allows different nations to establish equilibrium through balancing payments. The fixed exchange rate systems place the exchange risk