Suppose a country has a fixed exchange rate. FX speculators notice that the country’s government is running large and continuing budget deficits. Briefly explain how this situation may lead speculators to believe that the government will have to devalue the country’s currency in the future. What action would the speculators likely take in anticipation of that event? Would this action make a devaluation more or less likely? Briefly explain. Note: No diagram is needed to answer this question.
Suppose a country has a fixed exchange rate. FX speculators notice that the country’s government is running large and continuing budget deficits. Briefly explain how this situation may lead speculators to believe that the government will have to devalue the country’s currency in the future. What action would the speculators likely take in anticipation of that event? Would this action make a devaluation more or less likely? Briefly explain. Note: No diagram is needed to answer this question.
Chapter21: International Finance
Section: Chapter Questions
Problem 4QP
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Suppose a country has a fixed exchange rate. FX speculators notice that the country’s government is running large and continuing budget deficits. Briefly explain how this situation may lead speculators to believe that the government will have to devalue the country’s currency in the future. What action would the speculators likely take in anticipation of that event? Would this action make a devaluation more or less likely? Briefly explain. Note: No diagram is needed to answer this question.
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