Question

Explain the logic of the following passage using the economical theories and models. Answer in words without using equations or graphs. (When referring to theories and models, you are required to explain their mechanism and/or intuition, not the math.) Grades will be granted based on how well you relate the passage to such theories and models.

Hong Kong’s freedom to raise interest rates is constrained by its currency's fixed link to the dollar, one of the few pegs to survive the Asian financial crisis. Other central banks do not have that excuse. Currency flexibility has given them the freedom to cut interest rates when growth slows. It should also allow them to raise interest rates when financial excess threatens–even if inter-est rates remain near zero in America, Europe, and Japan.

Answer 1

Hongkong has a highly developed and free market economy. it is characterised with low taxation and near about free port trade along with a well established financial market internationally.in 2015, Hongkong scored 8.97 as per world index of economic freedom.massive disruption causes to stock bonds and other property markets when capital fight arise.this leads to increase in cost of borrowing, shrinking if Liquidity.if peg fails it is an indicator that all the reserves of government are exhausted.successivs increase of interest rates of US and their implementation,these together linked and controlled the freedom of flow of capital.hongkong's trade is high and sophisticated.real exchange rate of hongkong are likely to depreciate currently.the more the real interest rates are the more it tightens the financial condition of the economy.economy of hongkong is highly dependent on trade and finance internationally.hongkong real per capita GDP increased at a multiplier of 1/9th.production cost are also very low and exchange control are absent.