4.1 - Depreciation Impacts

Question 1

What are the principles of a fixed rate?

Answer 1

Govt/CB fixes currency value
Pegged rate becomes official rate
Adjustable Peg

Question 2

How does a depreciation affect inflation?

Answer 2

Higher import prices passed on
However - May lower I

Question 3

How does a depreciation affect growth?

Answer 3

Higher net exports usually stimulate growth
Depends on PED + imported components

Question 4

How does a depreciation affect unemployment?

Answer 4

Competitive currency
Stimulates productivity + multiplier?
Further AD + employment growth

Question 5

How does a depreciation affect the balance of trade?

Answer 5

Depends on PED (J Curve)
SR, inelastic, worsens balance
LR, elastic, improves balance

Question 6

How can a depreciation improve the balance of trade in the long run?

Answer 6

Price elastic
Export prices fall
Import prices rise
Export demand rises, import demand falls

Question 7

How does a depreciation affect FDI?

Answer 7

Currency less attractive
Lower demand
FDI deterrent