EC249 Lecture Notes - Lecture 4: Fiscal Policy, Managed Float Regime
Document Summary
The payments a country makes and payments a country receives. You let your exchange rate move against other currencies, but you also intervene. Your currency is not quite fixed, but it does float closely with the pegged currency. Was a basket of currency, would commit to not let their currency vary too much from the. The law of one price holds, then r exchange rate should = 1. Law of price does not normally hold, so you can compare prices bewtween countries. Take pressure off nx but increasing government spending. When greece converged with the euro, they took advantage of the cheap government borrowing, eventually borrowed too much and could not repay. Make sure that prices don"t rise to fast. Inflation comes from output pressure on activity and prices with an increase in outflow. E. g. if inflation is going to fast, raise interest rates to put downward pressure on output. Or decrease to put upward pressure on output and investment.
