Undergoing dollarization :It loses it monetary ability to influence the economy output and control the interest rate in the local economy because everything concerning the currency that they have adopted will be decided by the foreign country which owns that currency. While the currency board loses the ability to influence the output but it has the ability to change the exchange rate or local interest rate when the need arise
2) Suppose that invertors perceive a higher risk of investing Europe as a result of a sovereign debt crisis. Make use of a graph of the foreign exchange market to show how this will affect the value of the euro against the dollar.
Return on $ Hi risk euro won’t be able to pay the debt
Return on $ deposit
The dollar will be strong
3) Hong Kong has a fixed exchanged rate against the dollar. If foreign investors become convinced that its currency is overvalued, what actions might they take to profit from this conviction? Would these actions make it easier or harder for Hong Kong to maintain the value of its currency against the dollar? Why?
They will short the currency, that is the will sell it and increasing the supply of Hong Kong currency and eventually pushing it down
4) How does a sterilized intervention by the bank of Canadian foreign exchange