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  1. #1
    Registered User Maxx0131's Avatar
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    Economics question

    "if the central bank simply buys foreign exchange from local firms or households in exchange for domestic currency, that will increase the monetary base and money supply, causing the exchange rate to depreciate against the foreign currency"

    I don't understand Why as a result of increase in money supply to a foreign currency, it will result in a depreciation?
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    Registered User whitepaper's Avatar
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    I can try to take a stab at this. I'll use the US and China as the examples.


    If China wants to keep the value of the Yuan low in relation to US dollars to continue to it's favourable exports to the US, it can use Yuans to purchase US dollars. In short, you have more Yuans in the market, for fewer US dollars, and you can think of it in terms of supply and demand; more yuan, fewer dollars, and the value of dollars to yuans goes up, and the inverse of that is true--the value of yuan to dollar goes down. Depreciation. Now Yuans are valued less than dollars, and China can keep things in a favourable position for its exports into the US.


    Misc economists can probably give a better explanation.
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    Registered User Maxx0131's Avatar
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    Originally Posted by whitepaper View Post
    I can try to take a stab at this. I'll use the US and China as the examples.


    If China wants to keep the value of the Yuan low in relation to US dollars to continue to it's favourable exports to the US, it can use Yuans to purchase US dollars. In short, you have more Yuans in the market, for fewer US dollars, and you can think of it in terms of supply and demand; more yuan, fewer dollars, and the value of dollars to yuans goes up, and the inverse of that is true--the value of yuan to dollar goes down. Depreciation. Now Yuans are valued less than dollars, and China can keep things in a favourable position for its exports into the US.


    Misc economists can probably give a better explanation.
    makes sense thanks brah repped
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