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Blades, Inc Case Study Chapter 6

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1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain. The intervention effort by the Thai government constituted direct intervention, since the government exchanged dollar reserves for baht in order to strengthen the currency. This action would increase the demand for baht and the supply of dollars for sale, which puts upward pressure on the baht. In indirect intervention, a central bank attempts to influence the value of a currency by influencing the factors that determine it. For example, if the Thai government wanted to strengthen the baht, it could have increased interest rates by decreasing the Thai money supply.

2. Did the intervention by the Thai government constitute sterilized or nonsterilized intervention? What is the difference between the two types of intervention? Which type do you think would be more effective in increasing the value of the baht? Why?

The intervention by the Thai government constituted nonsterilized intervention. In using a nonsterilized intervention, a central bank intervenes in the foreign exchange market without adjusting for the change in money supply. Using sterilized intervention, a central bank intervenes in the foreign exchange market while retaining the money supply. Since the Thai government exchanged dollar reserves for baht in the foreign exchange market, the dollar money supply is increased. An increase in the money supply may decrease U.S. interest rates, which may additionally weaken the dollar with respect to the baht. In this case, the nonsterilized intervention may compound the desired effects of the intervention effort. This would also be the most effective choice if it is the intentions of the Thai government is to increase the value of the baht.

3. If the Thai baht is virtually fixed with respect to the

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