Forex reserves are the foreign exchange monies that a country has. So since most trading is done in dollars (cause is stable - and because everyone trades in it, it becomes even more stable), Pakistan acquires dollars when we sell textiles or overseas pakistanis send money back home. This is what is refered to as forex reserves. If we did not have enough reserves, if companies wanted to import something and they needed the UD $, you would suddenly find that each new $ the company requires becomes more expensive then the last (that is the value of the rupee falls). That is sort of how the value of the currency changes. And in the financial markets of today its something that happens around the clock though generally for us, it only occurs during Pakistani financial business hours cause no other country requires rupees.
The stability of the $ comes about because of the huge economy the country has plus the fact that everyone else uses it. Small changes in the need of $ do not change it much.
The value of the rupee can only be pegged by the government however, there is a huge blackmarket when the value of the pegged ruppee value is significantly different from the actual market value. Thus in most countries including Pakistan the currency is free floated (that is it can change based on market value and is not pegged). The currencies arent really pegged to a particular foreign currency but it is just a reference to our major trade partners cause those are the currencies we would require the most.
Inflation occurs due to different reasons. The first could be printing too much money and secondly a contracting economy - that is the total value of goods and services falls.
Hope that helps Aj... my post is all over the map but I was trying to answer everything you asked.
PR - the money is circulated through the banking system. So each back has an account with the federal bank (or the federal reserve in the US) and when they lend out money or take in cash, at the end of the day they figure out how much assests (deposits-loans) they have. A certain percentage of their assests have to be kept with the Federal bank by law (thats how the government controls the amount of money in the country). So if the government changes this ratio, it can "remove or create" money. In the US this is controlled by the Federal reserve bank's chairman (GreenSpan) and there is governmental effects on it to a certain extent. In countries like Pakistan, this policy is manageed directly by the government and hence we often see the government causing inflation through their short term policies of printing excess money just to pay off wages. In Japan on the other extreme, the Bank chairman and the political system are totally seperated and hence the two may have different economic policies and implement them in different ways.
if any of this does not make sense let me know and i will try and make it clearer.
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*Originally posted by hmcq: *
Forex reserves are the foreign exchange monies that a country has. So since most trading is done in dollars (cause is stable - and because everyone trades in it, it becomes even more stable), Pakistan acquires dollars when we sell textiles or overseas pakistanis send money back home. This is what is refered to as forex reserves. If we did not have enough reserves, if companies wanted to import something and they needed the UD $, you would suddenly find that each new $ the company requires becomes more expensive then the last (that is the value of the rupee falls).
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what i understand is if the forex reserve(dollar) is less with the fedral bank, they would ask for more rupees from the companies to give them the dollars and the value of rupee decreases. and if the fed-bank has enough dollar deposits with them, they will ask for less rupees for the same dollar.
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The stability of the $ comes about because of the huge economy the country has plus the fact that everyone else uses it. Small changes in the need of $ do not change it much.
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what happens if the $ is over printed.. would it affect the countries who peg there currencies to the $.
what if the US prints more $ and does not pass them on to there economy but lends it to other countries or use it for government expenses (like manufacturing weapons) , would it still affect the economy of the US or other countries.
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PR - the money is circulated through the banking system. So each back has an account with the federal bank (or the federal reserve in the US) and when they lend out money or take in cash, at the end of the day they figure out how much assests (deposits-loans) they have. A certain percentage of their assests have to be kept with the Federal bank by law (thats how the government controls the amount of money in the country). So if the government changes this ratio, it can "remove or create" money.
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does this mean, any new circulation of money start with lending money and paying government expenses.
if there is an excess of $ then the value of the dollar relative to other currencies falls.
No matter if the money is sent to other countries or spent locally, the total amount increases and that changes the equilibium and so the value is likely to fall, espcially in the current financial markets where everything is instantaneous and connected.
I am not sure of the exact mechanism of how the money is moved out into the peoples pocket but basically the government altering the ratio of the money the banks need to hold with the federal bank limits the amount thats out there. Otherwise the banks have a desire to lend out as much money as possible because they make money off the interest.
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*Originally posted by ahmadjee: *
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I wonder sometimes when there is a shortage of money or not enough money for the government to pay it's employees, why don't they just print some more money? ...
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I asked this question to my father who is banker by profession when I was 6-7 years old, and he gave me the "supply and demand" answer , not sure if I understood at that time but did make some sense.