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Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.

A central bank can influence the value of its national currency by raising or lowering interest rates, thereby encouraging borrowing and spending by other banks, businesses, and consumers. It can also affect other nations' currency values by buying or selling its reserves of another nation's currency, thereby raising or lowering the value of that currency. A central bank may wish to depreciate its own currency by selling it on the open market to encourage foreign investment and tourism or to encourage purchase of its exported goods abroad (Floating vs. fixed exchanges, 2011, CMSFX). However, a currency that is worth less also means that it is more expensive for residents of the home nation to buy goods and services abroad and to travel, when they exchange their money for the native currency.

What did the central banks do to stabilize the financial systems in 2007 -- 2009?

To stabilize the failing U.S. economy, the Federal Reserve drastically slashed interest rates. This was intended discourage saving and encourage borrowing by consumers and businesses and also to liberalize financial policy for banks wary of extending even short-term loans necessary for regular transactions. It increased its infusion of cash into the economy sharply as well. Other banks worldwide pursued similar policies. "The Bank of England base rate at the beginning of the financial crisis was 5.75%. Its discount rate was 1% higher. The Fed funds rate was 5.25% and its discount rate was 0.5% higher. The ECB rate was 4%, with a more variable discount usually up to 1% higher. The Fed took a more aggressive approach to cutting interest rates in 2007. It cut twice at regular FOMC meetings on 18 September and 11 December" (Morgan 2009). In contrast, the European Central Bank, fearing rising inflation rates, did not slash interest rates as drastically. This has made it more difficult for the EU countries that were hardest-hit by the crisis, such as Ireland and Greece, given that they cannot lower the value of their currency to bring in foreign dollars and tourism and deal with their debt and cannot infuse cash to stimulate their economies (Baker 2011). And the Bank of England "was notably more reluctant than the Fed or ECB to adopt loosened liquidity policies for commercial banks" (Morgan 2011).

In an effort to stabilize the financial system how much money, in U.S. dollar equivalent and as a percentage of the country's GDP, did the European Central Bank, Bank of England, Bank of China, and the Federal Reserve put into the economy in 2008 and 2009?

The two U.S. stimulus packages totaled nearly $1 trillion during 2008 and 2009; the ECB plan includes targeted and temporary measures amounting to 200 billion Euros, or 1.5% of EU GDP; the Bank of England stimulus was 200 billion Pounds; the Bank of China deployed a 4 trillion yen stimulus package

How well did each country's efforts work at stabilizing the economy?

The U.S. unemployment rate remains high and the stock market remains on shaky ground, but overall the consensus is that the actions of the Fed prevented a massive, worldwide financial collapse. The Euro Zone has been plagued with difficulties because of the struggles of various governments to come an agreement that can address the various fortunes of its component states, some of which have recovered, others of which are in grave financial jeopardy. "At least four members of the ECB's governing board voted against buying Italian and Spanish bonds last Thursday because of fears that the intervention would leave the central bank holding the lion's share of the £523billion (€600bn) in debt issued by both governments in the course of a year" (Market plunge, 2011, Telegraph).