Question

International econ

Assume that Malaysia wants to maintain a fixed exchange rate for the Malaysian ringgit against the US dollar. If speculators begin to expect that the Malaysian ringgit will depreciate, what could the Malaysian Central Bank need to do to prevent a devaluation of the ringgit? Give two possible courses of action the Bank could take.

Answer 1

If speculators expect ringgit to depreciate, they will start selling ringgit and buying US dollar. As a result, ringgit will actually depreciate due to the speculative attack.

To prevent ringgit from depreciation, the Central bank can take following actions:

(1) Sell US dollars in order to increase its supply, making dollar depreciate dollar against ringgit, keeping ringgit at a fixed level, or

(2) But ringgit in order to increase its demand and keep it appreciated until ringgit reaches the officially determined value.