Assume That There Is a Balance of Payments Deficit Caused

Essay

Assume that there is a balance of payments deficit caused by a high rate of domestic inflation.
(a) What effect will a deflationary monetary policy (a reduction in money supply) have on interest rates?
raise/lower them
(b) What effect will this have on the capital account?
cause an inflow/outflow of capital
(c) What effect will this have on the money supply?
increase it again/reduce it further
(d) What effect will this have on inflation?
help to reduce it/increase it
(e) What effect will a deflationary fiscal policy have on interest rates?
raise/lower them
(f) What effect will this have on the capital account?
cause an inflow/outflow of capital
(g) What effect will this have on the money supply?
increase/reduce it
h) What effect will this have on inflation?
help to reduce it/increase it
i) Which will be more effective under fixed exchange rates - fiscal or monetary policy?
fiscal/monetary