Question

Do you agree that manipulation of the domestic currency by central banks and/or government entities to manage the trade deficit should be a policy variable similar to the manipulation of interest rates, money supply and fiscal spending (all used to manage the economic cycle)? Why or why not? Please explain.

I want to agree that domestic currency manipulation should be treated as a policy variable? Can you give me an idea of how I should formulate this argument in a couple paragraphs?

Answer 1

Domestic currency manipulation definitely should be treated as policy variable just like interest rates to manage trade deficit. This is so because it helps nations curb excessive imports and make their exports competitive through devaluation as well.

Treating currency as policy variable enables management of current account deficit and forex reserves and also helps in stability of exchange rate thereby controlling inflation in the economy. Thus, it helps combat hyperinflation and recession and management of other macroeconomic variables.

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