Question

Supposed in the fixed exchange rate regime, the Central Bank of Malaysia (BNM) is planned to implement a revaluation policy of Ringgit Malaysia (RM) to the US dollar. Using the IS-LM-BP model, briefly analyze the effect of this exchange rate policy on the Malaysian economy under perfect capital mobility assumption. [10 marks)

Answer 1

Under the fixed exchange regime, the central bank of malasia is planned to implement the policy ringgit malasia to us dollar. The monetary policy of the ountry malasia become ineffective tool in fixes rate system . the expansion of reserve currency of malasia forces the domestic country to the surplus in BOP(balance of payment) to maintain the fixed exchange rate sysytem. The country has been got more attracted to the extraordinary performance of the economy , but eventyhough they entanglemd the economic crisis. Then the central bank of malasia as the immediate response to the crisis interfered in foreigh exchange market. The bank upheld the value of ringgit and brought in by the bigining of month july 1997.

Malasian economy is open to international payments and trade and facing more problems than aclosed econmy. the process of financing reflation proved the problems for receving the foreighn funding . A country can accept the exchange systems from the floating exchange rate system to th fixed system. The monetary policy is framework which encompasses in 3 directions . It si characterised by the autonomy in conduct , and the choice of exchange systems .the interntional currency ringgit is adopted for attaind independence in the year 1957. From the mid of 1980 the exchange rate BNM given more focus against the dollar of nation singapore. It soon bcome widely recogonised for the US dollar pegged. In th face of asian crisis the transaction of floating exchange rate suystem increased the volality of US dollar. Thus the structure of malasian economy became desirable.

The malasian currency ringgit is used to differntiate between the currencies of singapore, australia and brunai. Ther were interchangeble agreemnt between those countries. Between 1997-1998 the ringgit lst its value against US dollars. When tyhe currency became constant the rate of US dollars increased. ringgit is allowed to float in Malasia .Allast it resulted in rising ringgit perceived in market.

LM BP Interest rate (i) 0 Ye Income (Y)

The qulibrium can be attaine dwhen the quantity of goods and services are equal to output of goods and services.Dpmestic imports, domestis taxes , domestic saving represents the the income received.