D
dextar
Member
Hi
Everytime i read the text on exchange rates and try to solve problems i find myself very uncomfortable.
An economy with a floating exchange rate has a deficit on the current account of its
balance of payments. Which policy combination would be most likely to solve this
problem?
A Decrease interest rates and increase income tax rates.
B Increase interest rates and leave income tax rates unchanged.
C Decrease interest rates and decrease income tax rates.
D Increase interest rates and increase income tax rates
My reasoning is like this . first of all if it is floating exchange rate CAD will automaticaly improve . So nothing to be done. It should be there for fixed exchange rate .Right?
Or otherwise, if CAD is negative means exports -imports is negative so we need to increase exports and reduce imports. This is a component of AD so means we need to increase AD . So definitely taxes should be lower.
Also i know if IR are lower then hot money would go abroad and depreciation would be there which will only increase the CAD. I think andwer should be C not D.
Also one more confusing thing is devaluation (fixed exchange rate). It increases the volume of exports and vice versa for imports. How?
Everytime i read the text on exchange rates and try to solve problems i find myself very uncomfortable.
An economy with a floating exchange rate has a deficit on the current account of its
balance of payments. Which policy combination would be most likely to solve this
problem?
A Decrease interest rates and increase income tax rates.
B Increase interest rates and leave income tax rates unchanged.
C Decrease interest rates and decrease income tax rates.
D Increase interest rates and increase income tax rates
My reasoning is like this . first of all if it is floating exchange rate CAD will automaticaly improve . So nothing to be done. It should be there for fixed exchange rate .Right?
Or otherwise, if CAD is negative means exports -imports is negative so we need to increase exports and reduce imports. This is a component of AD so means we need to increase AD . So definitely taxes should be lower.
Also i know if IR are lower then hot money would go abroad and depreciation would be there which will only increase the CAD. I think andwer should be C not D.
Also one more confusing thing is devaluation (fixed exchange rate). It increases the volume of exports and vice versa for imports. How?