If a country wishes to depreciate their own currency, how could they do so in terms of monetary policy? List three possible effects depreciating their currency will have on the economy.

This is a question relating to international economics. In order to depreciate the currency, the country would have to use an expansionary monetary policy, as this would increase the supply of their own currency and so the price of it would decrease. As for fiscal policy,

By depreciating their currency, there will be several effects on the economy. Some of these effects include:

- Domestic goods will become cheaper abroad, so exports increase (This is because the goods that are produced will be cheaper in terms of foreign currency because the currency is weaker and so foreigners find their goods cheaper and will buy more of them)

  • Foreign goods will become more expensive compared to domestically produced goods, so imports decrease (This is because the imports are bought in foreign currency, and the foreign currency is now more expensive because foreign currency is stronger due to the depreciation.)

- Because of the increase in exports and decrease in imports, the country will likely experience and increase in aggregate demand (This is because aggregate demand can be expressed as AD = C + G + I + (X-M), so when X (exports) increase, and M (imports) decrease, the overall aggregate demand of the economy will increase)

Answered by Silje I. Economics tutor

3090 Views

See similar Economics IB tutors

Related Economics IB answers

All answers ▸

Evaluate the impact of a price ceiling


Explain the effect on GDP of an expansionary monetary policy (10)


How would you explain, in your own words, the concept of "Decreasing Returns to Scale"?


What is structural unemployment and how can government intervention affect the level of structural unemployment?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo
Cookie Preferences