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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Country X wants to lower the value of its currency on the foreign exchange market. Under a flexible exchange rate system, how can it do that?

To determine

The measures to lower the value of currency under flexible exchange rate system.

Explanation

Under flexible exchange rate system, the factors that affect the equilibrium rate of exchange consists of difference in the growth rate of income, difference in inflation rates, and difference in real rate of interest. Increase in income, reduction in inflation rate, and increased real interest rate will lower the value of currency.

As the income of the country increases, the demand for goods in both domestic and foreign goods increases. As demand for foreign good increases and cause depreciation to the domestic currency and appreciation to foreign currency...

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