How can an increase in Foreign Exchange Reserves help cushion the effect of inflation to citizens?
We were assigned to analyze a news article and mine is about the Philippine government's measures vs. inflation and selling its remaining Petron shares is one of their measures. It was said that this will help increase Foreign Exchange Reserves. Now, I'm wondering how this can help reducing the effects of inflation.
A central's bank sale of domestic currency to buy foreign assets in the foreign exchange market results in an increase of the monetary base.
The increase in the money supply will lead to a higher real money supply in the short run which will cause the interest rate on domestic currency assets to fall shifting the demand curve to the left.
When the demand curve shifts to the left prices go down to reach a new lower equilibrium level.
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January 13th, 2009 at 5:09 pm
A central's bank sale of domestic currency to buy foreign assets in the foreign exchange market results in an increase of the monetary base.
The increase in the money supply will lead to a higher real money supply in the short run which will cause the interest rate on domestic currency assets to fall shifting the demand curve to the left.
When the demand curve shifts to the left prices go down to reach a new lower equilibrium level.
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