Application Assignment based on Theme 3: Open Economy Macroeconomics

The monthly US inflation for May was 5% year on year, much more than the desired target of 2%. According to experts, main reasons for the elevated inflation are -

a. Production loss due to partial restrictions on economic activities

b. Large cash transfers for sustained household demands which exceeds the current supply

c. Prolonged expansionary monetary policy The US Fed started its expansionary monetary policy back in 2008 by taking many conventional and unconventional steps. Asset purchase program, also known as quantitative easing (QE), was one of them. In this program, the central bank purchases assets (mainly government securities and sometimes private sector securities) from the market and inject liquidity in the system. Two decades of persistently low inflation made US policymakers complacent and convinced that they can wait with this loose monetary policy. Later, the Fed has further increased the quantum of quantitative easing to tackle the pandemic induced recession. Given the current unique status of the US dollar as a reserve and vehicle currency, the impact of US domestic policies spills over to the rest of the world. Currently, the Fed officials feel the elevated inflation is transitory. What if, the current inflation level continues to persist longer and looks non transitory, which forces the Fed to take corrective actions.

1. Anticipate the consequences of higher US inflation on below mentioned countries. Explains all possible consequences in detail and with reasons.

India with managed exchange rate system A Latin American country with a managed exchange rate system but with high short term foreign currency debt and less foreign exchange reserve.

2. How would the change impact your company business? Explain with appropriate reasons. Guidelines: 1. Maximum page limit -4 Think of every aspect of your business (e.g. production, revenue, etc.) for making conclusion on impact on your company's business.