Money and Banking Assignment Example | Topics and Well Written Essays - 3500 words

Money and Banking - Assignment Example Money supply as defined by Fed does not include bank reserves. It only includes such money that may be used for exchanging goods and services. On the other hand, demand deposits and all other cash which can be used for transactions are included in the money supply.  The money supply in the form of loans is in the form of cash. so, money supply in cash is equal to the number of loans.   STRONG DOLLAR: strong dollar happens when U.S. dollar increases to a level with respect to any other currency which has a high rate of exchange for other currency which is relative to the dollar. WEAK DOLLAR: Weak dollar occurs when U.S. dollar falls to a level with respect to another currency that possesses high exchange rates for other currency that is relative to the dollar. INTEREST RATE POLICY AND DOLLAR STRENGTH: The interest rate policy affects the strength and weakness of the dollar to a great extent. An increase in interest rate will increase the demand for the dollar so that more investments can be made in U.S. assets. Thus the value of the dollar will also increase. Increase in value means strong dollar. Thus, the dollar will get stronger with higher interest rates. On the other hand, the lower the interest rates, the weaker will be the dollar due to the same reason. DOLLAR EXCHANGE RATE:   If we analyze the exchange rate of Dollar with respect to major countries Broad Index, we see that in January 2009, the dollar exchange rate was 89.5039 which reduced to 80.3001 by the end of September 2011. The decrease was gradual and consistent. However, the exchange rate rises initially till March 2009 after which it started falling. It was 77.83 by the end of July 2011. However, it rises in August and September and reaches to 80.3001 in September 2011. EFFECT OF DOLLAR STRENGTH/ WEAKNESS ON CONSUMERS, BUSINESS AND ECONOMY: The exchange rate analysis of dollar for the past two years reveals that the dollar is continually weakening. This weakness will affect all the consumers and businesses and will also have impacts on the economy of the country. The economists are of the view that weak dollar will affect every aspect of the economy. The prices of consumers clothing, electronic, the rates of mortgages and job markets will all be affected by the dollar value. The weakness in dollar value also asserts an increase in oil prices. This increase will definitely affect the producers. Their production costs will rise. Consequently, the producers will increase the prices of consumer goods. This will affect consumers and thus, the whole economy would be affected. the weakness of dollar will also affect some other currencies. This is due to the reason that as the dollar got weaker and weaker; the investors will tend to search for some other currencies to which are relatively stable as compared to Dollar. This will increase the demand for other currencies and decrease in the demand for the dollar. Consequently, the interest rate will tend to decrease. This will affect the deposits of individuals and businesses in the banks. Finally, this will again have an impact on the whole economy.