Question

In: Economics

Fully explain how the balance in the BOP is related to the equilibrium exchange. In addition,...

Fully explain how the balance in the BOP is related to the equilibrium exchange. In addition, explain how an appreciation of the domestic currency will correct a balance of payments deficit stemming from both a FA and CA deficit.

Solutions

Expert Solution

Answer-

With the result demand for local currency increases till exchange rate falls. On the other hand if demand for foriegn exchange is greater than supply, exchange rate will tend to rise. The demand for imports will rise and the demand for exports will tend to fall. This will happen till equilibrium exchange rate is reached.Bop is related to equilibrium im exchange rate. If the demand for local currency is greater than supply the exchange rate will tend to fall. At this exchange rate the demand for imports will be less and demand for exports will be high.

Appreciation will reduce demand for exports as foriegners will not import much due to higher price of country's goods. On the other hand investment in country will fall as it becomes costly in local currency of foriegners and returns are less in terms of domestic currency. The demand r for Foreign goods will increase as they are cheap. Also investment in foreign countries will rise as it is cheap and returns will be greater in terms of local currency. Thus bop surplus will be corrected.


Related Solutions

Fully explain how the balance in the BOP is related to the equilibrium exchange. In addition,...
Fully explain how the balance in the BOP is related to the equilibrium exchange. In addition, explain how an appreciation of the domestic currency will correct a balance of payments surplus stemming from both a KA and CA deficit.
What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect...
What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect the exchange rate. Discuss the impact of BOP (pre and post October 2019 crisis) on the Lebanese economy and exchange rate
What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect...
What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect the exchange rate. Discuss the impact of BOP
What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect...
What is the Balance of Payment (BOP)? How does BOP and the balance of trade affect the exchange rate.
Fully explain the effects on equilibrium output, interest rates, and the exchange rate from a decrease...
Fully explain the effects on equilibrium output, interest rates, and the exchange rate from a decrease in the domestic price level. (Include graphs)
Fully explain the effects on (domestic) equilibrium output, interest rates, and the exchange rate from an...
Fully explain the effects on (domestic) equilibrium output, interest rates, and the exchange rate from an increase in the foreign country’s money supply under fixed and flexible exchange rates with mobile and immobile capital.(Include Graphs)
Fully explain the effects on equilibrium output, interest rates, and the exchange rate from an increase...
Fully explain the effects on equilibrium output, interest rates, and the exchange rate from an increase in net exports under fixed and flexible exchange rates with mobile and immobile capital. (Include graphs)
Explain why a BOP disequilibrium can be identified with disequilibrium in the foreign exchange market.  
Explain why a BOP disequilibrium can be identified with disequilibrium in the foreign exchange market.  
fully explain how the inflation and ouput gap are related to the Taylor Rule in financial...
fully explain how the inflation and ouput gap are related to the Taylor Rule in financial economics
how will the BOP imbalances impact the local currency if your country uses a fixed exchange...
how will the BOP imbalances impact the local currency if your country uses a fixed exchange rate regime as opposed to a floating exchange rate regime? How can governments use the expenditure-switching policy to resolve their BOP issues?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT