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Blades Inc

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Blades Inc., a U.S. roller blades manufacturer, began exporting their product to Entertainment Products Inc., a Thailand company. Shortly after exportation began, Asia developed weak economic conditions. This resulted in an excess supply of the Baht. To combat this, the Thai government decided to trade in baht reserves for dollar reserves and invest them in the foreign exchange market. The Thai government participated in direct intervention. Direct intervention is a process that the government uses to change the amount of money supply within a country. The government can exchange their home currencies for foreign currencies and invest in the foreign exchange market. For example, if the Thai government wanted to force the baht to depreciate they would exchange the baht for another currency and invest that currency within the foreign exchange market. If they wanted the baht to appreciate they would exchange foreign currencies for the baht in the foreign exchange market. Because the Thai government exchanged the baht for foreign reserves, they were causing the baht to depreciate in value. There are two different types of direct intervention; sterilized and nonsterilized intervention. Nonsterilized intervention happens “when the Fed intervenes in the foreign exchange market without adjusting for the change in the money supply” (Madura, 2010). The end result of nonsterilized intervention is a change in the money supply. Sterilized intervention occurs when “the Fed intervenes in the foreign exchange market and simultaneously engages in offsetting transactions in the Treasury securities markets” (Madura, 2010). These two transactions leave the money supply unchanged. The Thai government participated in nonsterilized intervention. They did not offset their exchange of baht reserves for dollars reserves by buying or selling Treasury securities. If the Thai government

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