Part 2 - Managed Exchange Rates 7. The Swiss National Bank wishes to reduce fluctuations in the value of the chf against the US$, and decides to set a maximum exchange rate for the chfat $1.10 per chf and a minimum at $0.90 per chf. Show these maximum and minimum exchange rates in the graph below as horizontal lines. Include today's equilibrium exchange rate on the graph. chf in the US 8. Rising incomes in the US lead Americans to demand more Swiss imports, causing demand for chf to rise. The equilibrium exchange rate rises to $1.20 per chf. On the graph above, show the increase in demand and the new equilibrium exchange rate of the chf in the US. 9. As your graph shows, the new equilibrium exchange rate of $1.20 per chf is higher than the maximum exchange rate established by the SNB. Outline how the SNB could use the following two tools to enforce its maximum exchange rate of $1.10 per chf. Explain the process by which each tool would achieve the SNB's objective. a. Interest rates: Welker's Wikinomics practice activities b. Forex market intervention:10. Assume the SNB successfully bring the exchange rate of the chf back to the maximum of $1 .10. Show and explain the effects of one of the policies described above in a new graph. chf in the US Explain: 11. What is the economic rationale behind the SNB's desire to place a maximum exchange rate on the chi? 12. Assume now that due to a change in tastes and preference of American consumers demand for Swiss goods and the chf decreases and pushes the equilibrium exchange rate down to $0.90 per chf. On the graph below show the maximum and minimum Welker's Wikinomics practice activities exchange rates established by the SNB and the new equilibrium exchange rate of $0.80 per chf. chf in the US13. As your graph shows, the new equilibrium exchange rate of $0.80 per chf is below the minimum exchange rate established by the SNB. Outline how the SNB could use the following two tools to enforce its minimum exchange rate of $0.80 per chf. Explain the process by which each tool would achieve the SNB's objective. a. Interest rates: b. Forex market intervention: 14. What is the economic rationale behind the SNB's desire to place a minimum exchange rate on the chf? 15. Outline the advantages and the disadvantages of the Swiss National Bank's decision to manage the Swiss franc's exchange rate. Advantages Disadvantages