Macroeconomics with Connect Plus
Quiz 21 :
Structural Stagnation and Globalization
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. It has been seen that dollar is depreciating with respect to yen i.e. fewer dollars are needed to buy same amount of yen. Now this means that exports of country U has increased as foreigner need to now buy less dollars to pay for export. But there is another problem that continuous falling of exchange rate means that the economy of country U is becoming weaker in respect to that of J, and investors would then prefer to invest in country J, or in country U with premium which lead to increase in interest rates. Imports will become costlier so they will decline increasing price level in country U. So, there are both pros and cons to depreciation of currency and depending on the objective of economy, suggestion to
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. Fiscal policy is the tool used by government to control and manipulate the economy. The main tools of fiscal policy are tax rates and government purchases. The government take decision for two different frameworks i.e.
If there is sudden and large drop in the value of the dollar then United States have to run the contractionary monetary and fiscal policy because this sudden and large drop in value of dollar will make the imports more expensive for the United States and U.S. exports cheaper. This encouragement to exports and discouragement to imports cause a balance of trade surplus and exert an expansionary effect on the economy. This expansionary effect contributes to the inflationary pressure. In order to reduce the inflationary pressure and boost the value of dollar, U S., has to undertake contractionary monetary and fiscal policy. However, this administration of contractionary monetary and fiscal policy will slow down the U.S. economy.