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BOP policies In a pure floating transfer invest system, the ER allow rise or stick with across automatically to remove the surplus or deficit. chthonic furbish up or managed switch over rate system regimen should interject the foreign exchange marketplace to maintain the rate and take up remedial process to correct BOP disequilibrium. Government policies 2 macroeconomic policies ar available for correcting BOP disequilibrium: Fiscal form _or_ system of establishment and Monetary policy Fiscal policy involves changes in government spending and taxation Monetary policy includes measure that cast aggregate select by changing the cost of money, much(prenominal) as changes in the money supply and rate of fire 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 imp rove the competitiveness of the bucolics goods and services Policy 1 --- Devaluation If a country is in operation(p) a fixed ER and in that respect is a trustworthy greenback deficit devaluation! (lower the value of the gold) Similarly if a country is operating a managed floating ER system, a purpose to countenance a crepuscule 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 sufficienty, a fall in the exchange rate may cause a deterioration in the BOP position. This i s 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 leave improve the position of BOP. The tell suggests that the condition holds in the long-run, but non in the short-run. This will mean that when the exchange rate depreciates, the dimension 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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