Please enable JavaScript.
Coggle requires JavaScript to display documents.
Economics 4.1.8 - Coggle Diagram
Economics 4.1.8
competitive devaluation
£ depreciates, price of X falls in terms of foreign currency and price of imports rises, Qd of X fall and Qd of M fall, X rises and M falls when elastic, Net exports rise and current account improves
-
-
this only applies in LR because in SR it takes people time to switch and contracts can stop people switching
-
consequences
if domestic producers and households rely on imported foods, parts and components a weak currency will increase import prices and lead to cost push inflation
-
-
-
fixed exchange rate
-
-
-
advantages
-
-
low inflation if exchange rate is set high as exports become more expensive, reduces demand pull inflation and cost push inflation
-
disadvantages
-
-
higher risk of speculative attacks on exchange rates if investors believe in the government intervention to restore parity
-
-
floating exchange rates
the exchange rate is determined solely by the forces of demand and supply so the foreign exchange rate can appreciate or depreciate
-
disadvantages
-
-
-
exchange rate weakens and causes inflation affecting countries that rely on imports of primary raw materials
-
-
-