Show How Intervention Can Automatically Correct a Balance of Payments

Question

Examlex · Accepted Answer

The Answer is Intervention can automatically correct a balance of payments deficit without further actions by the central bank through the process of market forces. When a country experiences a balance of payments deficit, it means that it is importing more goods and services than it is exporting, leading to a net outflow of currency.

In response to this deficit, the country's currency will weaken in the foreign exchange market. A weaker currency makes the country's exports cheaper for foreign buyers and imports more expensive for domestic consumers. As a result, the demand for the country's exports will increase, while the demand for imports will decrease. This shift in demand will eventually lead to a reduction in the balance of payments deficit.

Additionally, a weaker currency can also attract foreign investment as assets become relatively cheaper for foreign investors. This inflow of foreign investment can help finance the deficit and improve the balance of payments.

Therefore, through the natural adjustments in the foreign exchange market, intervention can automatically correct a balance of payments deficit without the need for further actions by the central bank.

Show How Intervention Can Automatically Correct a Balance of Payments

Essay

Correct Answer:
Answered by ExamLex AI

Show How Intervention Can Automatically Correct a Balance of Payments

Essay

Correct Answer:Answered by ExamLex AIShow Answer

Correct Answer:
Answered by ExamLex AI