Author Question: Explain how a country with a current account deficit is a ripe candidate for currency devaluation. ... (Read 96 times)

azncindy619 · **on:** Jun 30, 2018

Explain how a country with a current account deficit is a ripe candidate for currency devaluation.

What will be an ideal response?

Question 2

Change in U.S. policy can lead to changes in inflationary expectations, interest rates, and exchange rates simultaneously as they all adjust to new equilibrium levels.

Indicate whether the statement is true or false

AngeliqueG · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

If, for example, Great Britain had a current account deficit, the holders of pounds would become nervous and shift their wealth into other currencies. In order hold the pound's exchange rate against the dollar pegged, the Bank of England would have to buy pounds and supply the foreign assets that market participants wished to hold. This resulting loss in foreign reserves, if large enough, would most likely force a devaluation by leaving the Bank of England without enough reserves to prop up the exchange rate.

Answer to Question 2

TRUE