Policies To Correct Disequilibrium In The Balance Of Payments
Economics notes
Policies To Correct Disequilibrium In The Balance Of Payments
➡️ Expansionary fiscal policy: This involves increasing government spending and/or reducing taxes to stimulate aggregate demand and increase exports.
➡️ Expansionary monetary policy: This involves reducing interest rates to encourage borrowing and investment, and increasing the money supply to reduce the exchange rate and make exports more competitive.
➡️ Exchange rate policy: This involves intervening in the foreign exchange market to buy or sell the domestic currency in order to influence its value. This can be used to reduce the current account deficit by making exports more competitive and imports more expensive.
What are the main policies used to correct disequilibrium in the balance of payments?
The main policies used to correct disequilibrium in the balance of payments are exchange rate adjustments, fiscal policy, and monetary policy. Exchange rate adjustments involve changing the exchange rate of a currency to make it more attractive to foreign investors. Fiscal policy involves changing government spending and taxation to increase or decrease the amount of money in circulation. Monetary policy involves changing the money supply and interest rates to influence the demand for money.
How do exchange rate adjustments help to correct disequilibrium in the balance of payments?
Exchange rate adjustments help to correct disequilibrium in the balance of payments by making a currency more attractive to foreign investors. When a currency is more attractive, foreign investors are more likely to purchase it, which increases the demand for the currency and helps to correct the disequilibrium.
What are the potential risks associated with using fiscal and monetary policies to correct disequilibrium in the balance of payments?
The potential risks associated with using fiscal and monetary policies to correct disequilibrium in the balance of payments include inflation, currency devaluation, and economic instability. Inflation can occur when too much money is in circulation, while currency devaluation can occur when a currency is overvalued. Economic instability can occur when the policies are not implemented correctly or when the policies are not well-suited to the economic situation.