9. Consequences and Evaluation of Exchange Rates

AD and SRAS Effects of a Weak Exchange Rate

Pros of a Weak Exchange Rate

Increased Growth and Living Standards

Decreased Unemployment

Increased Current Account Balance

Inward FDI

Cons of a Weak Exchange Rate

Increase in Inflation ad Interest Rates

Decrease in Living Standards

Domestic Producer Inefficiency

Increase in Foreign Debt Burdens

AD and SRAS effects of a Strong Exchange Rate

Pros of a Strong Exchange Rate

Decreased Inflation and Interest Rates

Increase in Living Standards

Increase Domestic Producer Efficiency

Decrease in Foreign Debt Burdens

Pros of a Strong Exchange Rate

Decreased Inflation and Interest Rates

Increase in Living Standards

Increase Domestic Producer Efficiency

Decrease in Foreign Debt Burdens

Cons of a Strong Exchange Rate

Decrease in Growth and Living Standards

Increase in Unemployment

Decrease in the Current Account Balance

Outward FDI

Evaluation for Strong and Weak Exchange Rates

Elasticities

Incomes Abroad

Incomes at Home

Protectionism

Output Gap

Firm Reaction to Higher Costs

Size/Duration

Pros of a Fixed Exchange Rate

Exchange Rate Stability

Domestic Producer Efficiency

Some Changes Possible

Less Currency Hedging

Cons of a Fixed Exchange Rate

Loss of Monetary Policy Autonomy

Large Need for Currency Reserves

Pros of a Floating Exchange Rate

Monetary Policy Autonomy

Less Need for Currency Reserves

Benefits of Exchange Rate Changes

Automatic Correction of Current Account Imbalances

Less Speculation on PPP reflected

Cons of a Floating Exchange Rate

Exchange Rate Volatility

Eval of a Fixed Exchange Rate

PPP

Retaliation

Lack of Competitiveness