Quiz 20: Macro Policy in a Global Setting
Balance of payments is like a financial report on the international trade which gives the insight on the financial status of the economy with respect to financial transactions. It is divided into current account, financial and capital account. In 1980s country U was having contractionary monetary policy which has high interest rates and when interest rates are high then foreigners like investing in country U which increases the demand of dollar and so it appreciates. Now as the value of currency has appreciated and so in response to that the exports will fall and imports will increase creating trade deficit. And high interest rates will decrease consumption as savings will increase but investments will decrease and so there was dual deficit even when dollar was high.
Balance of payments is like a financial report on the international trade which gives the insight on the financial status of the economy with respect to financial transactions. It is divided into current account, financial and capital account. Exchange rate is the rate at which currency of one country is traded with another. a.The benefit of using gold standard is that it will reduce the exchange rate risk and the currency risk. It also helps in controlling the speculation of currencies with lead to uneven fluctuation in the exchange rates around the world.b.The problem with this approach is that the dependence of economy on gold reserve increases, and as gold is a natural resource so it is present in limited quantity around the world. The other problem is that it limits the effectiveness of monetary policies that a government can use in the times of business cycles to control the fluctuating variables in the economy.
Balance of payments is like a financial report on the international trade which gives the insight on the financial status of the economy with respect to financial transactions. It is divided into current account, financial and capital account. The balance of trade is the difference between the exports and imports, and it is one of the components of current account. Now when the imports are more than exports then there will be balance of trade deficit but this deficit is just one part of current account but if there is surplus in other parts of current account more than the deficit then overall currenct account will be in surplus.