11.1-2 Policies to correct BoP disequilibrum and Exchange rate

Question 1

expenditure switching policy

Answer 1

policy measures designed to switch consumption from imports to domestic products to reduce balance of trade deficit

Question 2

expenditure reducing policy

Answer 2

policy measures designed to reduce overall consumption on both imports and domestic products to reduce balance of trade deficit

Question 3

nominal exchange rate

Answer 3

market exchange rate not adjusted for inflation

Question 4

real exchange rate

Answer 4

market exchange rate adjusted for inflation

Question 5

trade-weighted exchange rate

Answer 5

It is calculated by taking into consideration the weights of shares of different currencies in trade of a country whose trade-weighted exchange rate is to be calculated.

Question 6

Marshall-Lerner Condition

Answer 6

The condition is met when the sum of PED for exports and PED for imports is more than 1.

Question 7

J-curve

Answer 7

It describes how balance of trade changes when currency depreciates