Competitive Devaluation

Question 1

Impact on net trade:

Answer 1

• higher net trade as exports become cheaper and imports more expensive.
• long term could boost investor confidence
  BUT - could lead to cost push or demand pull inflation, depends on PED of trade - Marshall Lerner condition, depends on state of world economy, can be expensive for gov or hold large reserves of foreign currencies to maintain a devalued currency

Question 2

Government/ central bank does not

Answer 2

Know better than market where currency should be, so BoP would not automatically adjust to economic shocks