Reference no: EM133495864

Prior to the 1997 Asian financial crisis, Malaysia had experienced substantial growth in tourism, establishing itself as a crucial contributor to foreign exchange earnings and employment opportunities. However, signs of strain emerged as exports decelerated and a significant current account deficit developed alongside a gradual exchange rate appreciation.

In early 1997, Malaysia experienced significant economic. Market confidence diminished, leading to substantial portfolio outflows, declines in equity and property values, and pressure on the Malaysian Ringgit (MYR).

The initial response of the authorities was to hike interest rates and tighten fiscal policy in an attempt to anchor market confidence in the financial system. In early 1998, fiscal policy was revised to a more expansionary stance. This policy mix proved to be insufficient to correct external imbalances.

In September 1998, Malaysian authorities introduced a policy package to insulate monetary policy from external volatility. It included measures such as a pegged exchange rate to the U.S. dollar and selective exchange and capital controls, complemented by a fiscal stimulus package that boosted capital spending.

Based SOLELY on the information provide above, answer the following subparts.

1. Vietnam is one of Malaysia's neighbours. Suppose it is also a major trading partner, explain the impact of relatively low unemployment in Malaysia on the exchange rate between the Malaysian Ringgit (MYR) and the Vietnamese Dong (VND), assume the Dong is free-floating. Discuss also the implication for trade between these two countries, ceteris paribus.

2. Discuss the impact of the appreciation of the Malaysian Ringgit (MYR) exchange rate on the country's export-oriented industry and assess the implications for the current account deficit.

3. Imagine an American traveller who was visiting Malaysia and buying some souvenirs paid by a U.S. credit card. Explain how this is recorded on Malaysia's balance of payments, specify affected accounts and subaccounts, and the supply & demand and flow of foreign exchange.

4. Using information provided in the course, describe the purposes of foreign exchange speculation. Analyze the expectations of potential international speculators who might be interested in the Malaysian Ringgit and outline the strategies they could employ to begin a speculative attack.

5. Explain the rationale behind the September 1998 Malaysian authorities' policy package in how those measures could bring about stability.

6. Discuss restrictions on the Malaysian authority's September 1998 policy responses in the context of the impossible trinity.