Questions 5

Questions 5 - Questions 5 1. A M B A= Sacrifice of current...

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Questions 5 1. A= Sacrifice of current consumption, essentially adjustement B= Sacrifice of future consumption, financing However, because there may be a constraint to the amount of financing one country can bring in, as in point M, might be forced onto a non optimal balance of financing and adjustment. 2. Use fiscal policy to control EB and monetary policy to control IB, that way you move closer towards equilibrium point. 3. For fiscal policy, best case scenario is if exchange rates are flexible, and capital is immobile. Changes in exchange rates endorse fiscal change. Fixed exchange rate regimes A B M EB IB Inflation/deficit Unemployment/ Surplus Inflation/Surplus Unemployment/Defici t Fiscal Policy Fiscal Policy
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are also relatively effective, but less so. Flexible exchange rate regimes with high capital mobility are relatively ineffective, and completely ineffective with perfect capital mobility. For monetary policy, best case scenario is flexible exchange-rates with immobile capital. Fixed exchange-rate with immobile capital, and flexible exchange-rate
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Questions 5 - Questions 5 1. A M B A= Sacrifice of current...

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