Question

Under the fixed exchange regime, if the country begins with a deficit in its overall balance...

Under the fixed exchange regime, if the country begins with a deficit in its overall balance of payments, to maintain the fixed exchange rate, explain the following

a)   How does the central bank intervene through monetary policy to affect the balance of payment?
b)   How does the central bank intervene through fiscal policy to affect the balance of payment?

Homework Answers

Answer #1

When there is a deficit, it means that the country is needs to pay more to other countries than it gets from other countries. When this happens, there is a depreciationary pressure on the currency.

A. To maintain the fixed exchange rate, the central bank can use monetary policy and reduce the local currency supply in the market. That will result in an appreciationary pressure on the currency and will counteract the depreciationary problem. Tha central bank achieves this by open market operations.

B. On the other hand, fiscal policy can also be used to tighten. This means the central bank will need to reduce spending and investment. That can be done by increasing taxes or reducing government spending. This will result in lower money supply and appreciation of the local currency.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Under the fixed exchange regime, if the country begin with a deficit in its overall balance...
Under the fixed exchange regime, if the country begin with a deficit in its overall balance of payments, to maintain the fixed exchange rate, explain the following How does the central bank intervene through monetary policy to affect the balance of payment? How does the central bank intervene through fiscal policy to affect the balance of payment?
A country that has been operating under a fixed exchange-rate regime falls into recession. All attempts...
A country that has been operating under a fixed exchange-rate regime falls into recession. All attempts at using fiscal polecat to lift the economy out of recession have failed. 1. If the central bank was to use monetary policy to help lift the economy out of the recession, it would want to (change, decrease or increase) the money supply and (changes decrease or increase) interest rates in the economy. 2. This change in interest rates would cause net capital outflow...
Suppose there is a large foreign country operating under fixed exchange rate regime. It devaluates its...
Suppose there is a large foreign country operating under fixed exchange rate regime. It devaluates its currency by increasing its money supply. How does this affect real exchange rate, net exports, investments, consumption of our small domestic economy in short run and long run?
Explain why a country operating under a fixed exchange rate regime and with a current account...
Explain why a country operating under a fixed exchange rate regime and with a current account deficit is a candidate for currency devaluation.
If most major economies are operating under a regime of fixed exchange rates, then a ________...
If most major economies are operating under a regime of fixed exchange rates, then a ________ in a country's balance of payments suggests that the country should ________ its currency. surplus; revalue surplus; devalue deficit; revalue All of these
In the Mundell prescription for monetary and fiscal policy under fixed exchange rates, expansionary fiscal policy...
In the Mundell prescription for monetary and fiscal policy under fixed exchange rates, expansionary fiscal policy and contractionary monetary policy would be recommended if a country were faced with Select one: a. unemployment and a balance-of-payments deficit. b. unemployment and a balance-of-payments surplus. c. inflation and a balance-of-payments deficit. d. inflation and a balance-of-payments surplus.
Explain how balance of payment crises and currency crises might arise under fixed exchange rate regime...
Explain how balance of payment crises and currency crises might arise under fixed exchange rate regime (Do not copy the answer from someone else, I know that there is same question on chegg webiste)
Suppose a country has fixed exchange rate and no capital controls. The country has kept the...
Suppose a country has fixed exchange rate and no capital controls. The country has kept the value of its currency below its market level. (a) Why is it easier for a country to undervalue its currency than to overvalue it? (b) What is the (intended) effect of this policy on current account, capital account, overall balance of payments and international reserves? (c) What will be the effect on current account, capital account, balance of payments and international reserves if the...
Consider a small, open economy with perfect capital mobility and a fixed exchange rate regime, whose...
Consider a small, open economy with perfect capital mobility and a fixed exchange rate regime, whose domestic interest rate is currently the same as the foreign interest rate. Suppose that it adopted the USD as its official currency. a. Draw the IS-LM diagram for this nation at its general equilibrium point E1, with equilibrium income level Y1 and domestic interest rate r1, what happened if central bank of this country expanded its money supply, please show the changes in the...
A country with a balance of payments deficit that wants to maintain the current exchange rate:...
A country with a balance of payments deficit that wants to maintain the current exchange rate: A. gains official reserves. B. loses official reserves. C. gains foreign liabilities. D. loses foreign assets.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT