The Effect of the Increase and Decrease of Inheritance Tax in the UK Essay

The Effect of the Increase and Decrease of Inheritance Tax in the UK Economy - Essay Example Exchange rate is the value of two currencies relative to each other, like exchanging the US dollar for a certain number of British pounds. This may be floating which means it changes from day to day or it may be pegged to another which means that it may have a certain amount of its currency held in another currency. The former is volatile while the latter is more stable since their setting is by the government fiat. [Aguirre, A., Ferreira, A. & Notini, H., 2003] The exchange rates have been experiencing fluctuations in different regions of the world and this has had major impacts in these regions which have involved the private sector as well as the government and in some cases the government has had to play the role of the private sector so as to stabilise the rate. In this context the exchange rate rise has been on the fore front and this has had adverse effect and implications on the economic activities as well as the social aspect of the people in these regions. The rise if the f oreign exchange affects the foreign direct investment [FDI]. This is an international flow of capital that provides the multinational organisations and companies with control over foreign affiliates. The foreign exchange can influence both the total FDI and the allocation of this investment across different countries. The increase reduces the countries production costs and the wages relative to those of the foreign country. This means that the value of its currency depreciates relative to that of the other country. This means that the overall rate of return to foreigners is increased and this contemplates the overseas investment projects in a country. The increase in the foreign exchange may be sometimes anticipated and this will leads to higher costs of financing of the projects due to interest rate parity conditions. In these cases, multinationals prefer to fund their overseas projects from the local kit as financing from the local become relatively expensive. This covers their mo nitoring costs and even the capital that keeps on increasing. The volatility of the exchange rates affects the production flexibility and also the risk aversion. There arises a problem where the producer produces the goods without the knowledge of the exchange rates as they affect the rate of production and the actual level of employment. Where there was risk aversion, the investors demand that they be paid compensation for the risks they incurred as the higher exchange rate raises the variability of and lowers the certainty. In this case therefore, the high rates of exchange tend to raise the values of the investment projects and due to the high costs; the profits are reduced. [Goldberg and Kolstad, 1995] The Australian bank decided to leave the rate of cash unchanged, while the central bank highlighted on its ability to lower the benchmark of the nation’s interest rate so as to ease the inflation pressures. Fig 1: Graphical illustration of Australian Interest rates from Jan uary 2004 through January 2010 This rising exchange rate leads to the tightening of the monetary policy. This in effect raises the interest rates to higher levels which are visibly seen to rise faster in the short run than in the long run. The result of this is that the foreign investors hold foreign assets because of the increased rate of return on the domestic assets with the tightened monetary policy and they expect that the domestic value will fall in future. There arises foreign debt due to the high appreciation of the real exchange rate. These may make the local currency to reach parity against the foreign currency like it was for the euro against the dollar between Australia and US. [Aron, J., Elbadawi, I.A. & Kahn, B., 1997] Identify the possible causes of this appreciation and analyse the extensive implications on the Australian economy which was saved by the collapsing economy of the Australian government and economy. The appreciation of the real exchange rate brings diver se effects which are extensive the short term aspect of