Question

How do automatic adjustment mechanisms operate to correct a deficit in the balance of payments under...

How do automatic adjustment mechanisms operate to correct a deficit in the balance of payments under a fixed and flexible exchange rate system? Explain your answer separately for fixed exchange rate and flexible exchange rate system.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The automatic adjustment mechanism is a market-driven mechanism in which there is no intervention of government. It is used to balance the deficit in the balance of payments. In this, the exchange rate is fixed but interest rates get change with time to time. In this, the balance of payment is in equilibrium.

Under the fixed exchange rate: In this, the gold standard is used and the exchange rate between the currencies is fixed. It results in the tremendous surplus because the price will encourage the sellers thus balancing the deficit in balance of payments.

Under the flexible exchange rate: Under the flexible exchange rate system, the deficit in the balance of payments will automatically get balanced with the forces of demand and supply of foreign exchange.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a fixed exchange rate system. Why is a persistent Balance of Payments deficit a cause...
Consider a fixed exchange rate system. Why is a persistent Balance of Payments deficit a cause for concern under a fixed exchange rate system?
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?
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?
Under a fixed exchange-rate system, what automatic adjustments promote payments equilibrium?
Under a fixed exchange-rate system, what automatic adjustments promote payments equilibrium?
The devaluation of currency would normally eliminate a deficit on the current account of the balance...
The devaluation of currency would normally eliminate a deficit on the current account of the balance of payments in countries with a flexible exchange rate system. But this is not always the case. Could you explain why it might not happen always? thank you for answer in advance
Explain how exchange rates may correct a balance of trade deficit? You attend a alumni event...
Explain how exchange rates may correct a balance of trade deficit? You attend a alumni event in Santiago Chile and you meet the Governor of the central bank. The governor tells you that the country experiences “deficits in the capital account of the Balance of Payments.” Based on this statement, what do you infer about the Peruvian economy? What is a put on the USD? How do firms use a put option?
c) How exchange rates may correct a balance of trade deficit?
c) How exchange rates may correct a balance of trade deficit?
Consider a country with a fixed exchange rate that is experiencing a deficit in it overall...
Consider a country with a fixed exchange rate that is experiencing a deficit in it overall payments balance. Show graphically (using IS-LM-FE) and explain how a change in domestic monetary policy could attempt to quickly eliminate the payments deficit. What could be a possible threat to the economy due to the policy change?
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)
Assuming perfect capital mobility and flexible exchange rates, explain the impact on the Irish economy of...
Assuming perfect capital mobility and flexible exchange rates, explain the impact on the Irish economy of a decrease in interest rates in the U.S. In your answer, clearly indicate the effect on income, rate of interest, balance of payments. (Show your answer with the help of an IS-LM-BP diagram and explain the mechanisms. Consider Ireland a small open economy with flexible exchange rates. b) Are Monetary and Fiscal policies effective in the case of question (a)? Explain with graphs
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT