Question
3a i) Hong Kong is taking a currency board arrangement such that it pegs its Hong Kong dollar with US dollar at a fixed rate.
3a i) Hong Kong is taking a currency board arrangement such that it pegs its Hong Kong dollar with US dollar at a fixed rate. How will the inflation rate and business competitiveness of Hong Kong be affected if there is a huge capital inflow to Hong Kong? Explain. Illustrate your answer with example.
ii) If Hong Kong is instead taking a floating exchange rate regime, how will the currency value and business competitiveness of Hong Kong be affected if there is a huge capital inflow to Hong Kong? Explain. Illustrate your answer with example.
iii) Compare and explain the degree of change of business competitiveness for Hong Kong in part (i): using a currency board arrangement and in part (ii): adopting a floating exchange rate regime for a huge capital inflow. Illustrate your answer with example.
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