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BOP policies In a pure floating rally prize system, the ER allow rise or know across automatically to remove the surplus or deficit. under(a) furbish up or managed switch over rate system organisation should interject the foreign exchange food market to maintain the rate and take up remedial accomplishment to correct BOP disequilibrium. Government policies 2 macroeconomic policies argon available for correcting BOP disequilibrium: Fiscal form _or_ system of presidency and Monetary policy Fiscal policy involves changes in government spending and taxation Monetary policy includes measure that figure out aggregate select by changing the cost of money, such(prenominal) as changes in the money supply and rate of absorb Policies choice for BOP deficit 1. ever-changing the value of the ER 2. Imposing or increasing import controls 3. Deflating the economy 4. transmit longer term measures to change the competitiveness of the soils goods and services Policy 1 --- Devaluation If a country is in operation(p) a fixed ER and thither is a contemporary greenback deficit devaluation! (lower the value of the property) Similarly if a country is operating a managed floating ER system, a finale to countenance a get back in the value of the currency entrust make the countrys goods and services more price competitive.

J curve effect However, before there is time for quest and supply to adjust richy, a fall in the exchange rate may cause a deterioration in the BOP position. This is known as the J curve effect! . [pic] The Marshall-Lerner status says that if the PED of imports and exports is greater than 1, then devaluation result improve the position of BOP. The tell suggests that the condition holds in the long-run, but not in the short-run. This will mean that when the exchange rate depreciates, the sense of equilibrium of payments will initially deteriorate, but in the long-run it will improve. Factors influence the speciality of Devaluation ...If you want to get a full essay, order it on our website: BestEssayCheap.com

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