Question

Together with large current account deficits, the Argentine government began running increasingly large budget deficits. How might this be structurally related to the choice of a fixed exchange rate regime?

		deficits were needed to finance capital outflow at the established rate
		with no monetary policy, fiscal policy became the only macroeconomic policy tool to fight recessions
		fiscal profligacy had nothing to do with the exchange rate, Argentina's political leadership was as irresponsible as its monetary leadership had been
		the debt allowed Argentina's government to import arms for an attempt at another war with Brittain

In the early 90s Argentina adopted a currency board, fixing the peso to the USD. What was the main motivation for this?

		to enhance export competitiveness
		to join the United States as a territory
		to tame inflation
		to create an overvalued real exchange rate

While inflation fell and stabilized, Argentina ran growign current account deficits through the 90s. What was the primary cause of this?

		overvalued real exchange rate
		financial contagion from East Asian Crises
		growing government budget surplus
		primary export commodity price spike

Answer 1

1) deficits were needed to finance capital outflow at the established rate.

This occurs when the government seeks to keep the value of a currency fixed against another currency.

2) to tame inflation

For taming inflation, long-term planning, regulatory support and coordinated efforts by the government, businesses and better consumer-awareness may have to get much more attention than they are getting now

3) overvalued real exchange rate.

An overvalued exchange rate implies that a countries currency is too high for the state of the economy. An overvalued exchange rate means that the countries exports will be relatively expensive and imports cheaper. An overvalued exchange rate tends to depress domestic demand and encourage spending on imports.