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Fixed ER, ↓ AD - Coggle Diagram
Fixed ER
Maintaining ER
Short Term
Using reserves
- Buying surplus
- Creates currency
surplus in FOREX
- Not good for econ
International Loan
- ↑ National debt
- Dev not possible
↑ Interest Rates
- Attract hot money
- ↑ D£ as ppl exchange to £
- ↑ cost of borrowing
↓ consumption
↓ inv, ↓ real output
↑ unemployment
Medium Term
Expenditure
reducing policy
- Deflationary
fiscal/monetary
- ↓ real Y ↓ AD ↓DM
- eg. ↑ T & ↑ interest rates
Expenditure
switching policy
- Aim to change
relative P of X&M
- To switch from
M to Dom G
↓ AD ↓ inflation ↓ P
↑ DX ↑ D£ ↑ PM ↓ DM
eg. ↑ T on M
eg. Import quota
= SM ↓ PM ↑
= S£ ↓ D£ ↑
eg. currency devaluation
Long Term
Supply Side Policies
- Aim: ↑ X ↑ D£
- Maintain D&S curve nearer to fixed rate so gov doesn't have to sell too much reserves
- ↑ long term competitiveness of G
- Encourage ↑ quality of G & ↓ CoP
- ↑ X ↑ D£
eg. R&D inv, grants & subsidies, tax incentives
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Using foreign currency reserve to buy surplus depletes reserve,
not good for econ,
huge surplus created in FOREX
When?
- Currency too strong,
G not competitive
- Currency too weak,
lost trust in currency
Above Equilibrium Rate
- QS > QD by (look at graph)
- Gov must buy this ^ to maintain this rate
- This shifts D → where S = D
Below Equilibrium Rate
- QD > QS = shortage
- Gov sells £ & buy foreign currency to maintain this rate
Revaluation
- Deliberate gov action
- to ↑ currency value
Devaluation
- Deliberate gov action
- ↓ currency value
Advantages
- Certainty - ↓ risk ↑ inv
- No speculation
- Spec. cause currency
fluctuations
- Prevents irresponsible
gov policies
- ↑ AD to gain votes
causes BOP deficit
- more policies
Disadvantages
- No auto BOP adjustments
- currency not allowed to fall
- so PX can't ↓ PM can't ↑
- DX can't ↑ DM can't ↓
- Deficit isn't fixed
- ↑ amt of foreign currency reserves needed
- Conflicts w/ other macro obj
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