INTBUS 6 Lecture Notes - Lecture 16: Foreign Exchange Market, Currency Basket, Devaluation
6 Oct 2020
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Show how bop adjustment is transmitted through a) prices; b) income; c) interest rates and d) money supply: explain how currency depreciation could eliminate a bop deficit. Devaluation: deliberate downward adjustment of the value of a country"s currency relative to another currency/group of currencies/standard. Actively pursued by governments to combat trade imbalance, reduce cost of exports, more global competitiveness. Increases the cost of imports of domestic products strengthening domestic business. Revaluation: calculated upward adjustment to a country"s exchange rate relative to a chosen baseline (e. g. wage rates, prices, gold, foreign currency). Decision by government or cb in fixed exchange rate regime to alter official value of currency. : government sets 10 units of currency= 1$ changes it to 5 units of currency= 1$ currency 2x expensive. Automatic mechanisms may restore bop equilibrium, but at the cost of recession or inflation. As an alternative, governments allow exchange rates to change:
