Chapter 17.1

Question 1

How do exchange rates automatically create a balance of payments in the floating exchange system?

Answer 1

Deficits in the current account create a downward pressure on the currency exchange rate and surpluses create un upward pressure

Question 2

How are the balance of payments made to balance in a fixed exchange rate system?

Answer 2

Policies are used to change currency demand or supply in order to keep the rate fixed

Question 3

Capital flight

Answer 3

Outflows due to currency speculation in expectation of a depreciation