International finance Essay Example | Topics and Well Written Essays - 1000 words - 2

International finance - Essay ExampleIt is suggested that an augment in home(prenominal) silver cater causes depreciation. Again an increase in domestic money demand for example results from domestic income increase or decrease in the expected inflation causes appreciation (Barnett & Chauvet, 2011). The model assumes that the purchasing ply parity normally holds. The changes in price influence the changes in permute rates.The flexible model assumes that parity of purchasing power (PPP) holds unceasingly. PPP implies that only traded goods exist, the modified model permits the distinction between non-traded and traded goods. The flexible model relies on the continuous PPP and existence of the stable money demand functions for both domestic as well as unknown economies. Recent experience has shown that the real rates of exchange have fluctuated over the years thereof causing shifts in the international competitiveness (Barnett & Chauvet, 2011). Flexible model can be termed as a market- clearing equilibrium model where purchasing power parity between different countries price levels is assumed. An increase in the domestic interest will cause a decrease in the demand for domestic money hence causing depreciation in the currency. Once Friedman (1953) stated that the stability of flexible exchange rate was determined by the stabilization of the speculators behaviors. Flexible model suggests that the prices including wages and goods prices, adjust instantaneously to their levels of equilibrium.In order to determine the exchange rate, it is clear that a rapid increase in home money supply than the foreign money supply will increase the rates of exchange one on one therefore leading to depreciation of home currency. The exchange rate which normally is the price of foreign currency increases with the stock of money (Kouretas & Papadopoulos, 2014). On the other hand, an