There has been a growing concern, lately, about the on-going feud between the European Commission and the

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Question:

There has been a growing concern, lately, about the on-going feud between the European Commission and the Italian government over the Italian budget deficit forecast for 2019. This has caused an increasing number of investors to convert their Euros into Swiss Francs.

a. Explain and show graphically what will be the consequence of these conversions on the value of the Swiss Franc (CHF) in terms of Euros, (i.e., on the EUR/CHF foreign exchange rate).

b. Suppose that the Swiss National Bank (SNB), the central bank, concerned for the country’s exporting companies, intervened in the foreign exchange market. How will the SNB intervene? (What exactly will it do)? Show graphically and explain the consequences of this intervention of the value of the Swiss Franc.

c. Explain the consequence of this FX intervention by the SNB on Switzerland’s monetary base.

d. Explain the consequence of this FX intervention of the level of the SNB’s international reserves. e. Explain and show graphically the consequence of the SNB intervention on the Swiss real interest rate.