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By S. P. J. du Plessis (Auth.)

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Of course, the ability of the American authorities to do this is limited by the number of pounds, or the quantity of gold convertible into pounds, over which it disposes. Note that this process could also have been illustrated by moving the whole supply curve. Government intervention to maintain a rate is, however, so unlike any of the other factors that make up a supply or demand curve for foreign exchange that this was not done in the diagram. The government is thus correctly seen as filling a gap between the quantities supplied and demanded.

There is thus a 4% interest rate advantage for New York. In a 90-day period that amounts to 1%, which multiplied by $20 000 amounts to $200. The bank would thus not offer to deliver £10 000 for $20 000, but for $20 200. So, if $20 200 exchanges for £10 000, $2,02 = £1,00 is the forward rate. Note that the pound, that is the currency of the country with the lower interest rate, is at a forward premium. ) Note, also, that the amount of the forward premium amounts to 0,02/2,00 or 1%, which is exactly equal to the interest rate differential.

At the same time exporters will lag, with the consequence that the normal or usual supply of foreign currency will not be forthcoming. As a result foreign exchange reserves will be run down and there will be downward pressure on the exchange rate. In this way leads and lags can in fact cause the expected depreciation in a country's currency that was the reason for the leads and lags in the first place. Of course, the opposite will happen with an expected appreciation of a country's currency. To conclude, the astute reader should note that the results of leads and lags in trading partners can tend to reinforce one another.

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