Impact of exchange rate depreciation or devaluation

. On the current account?

A devaluation or depreciation of the ex/r will lead to

•A fall in the foreign currency price of X

•An increase in the domestic price of M

This will only improve the CA if the MLC holds

Sum of PED for X and M > 1

On the rate of inflation

Inflationary pressures from a fall in the value of a currency:

DP inflation – net X rises, AD?, Price level?

CP inflation – price of imported materials & manufactured goods rise, SRAS?, Price level?, could lead to wage-price spiral

On FDI flows

A fall in the value of a currency means that it would be cheaper for global companies to invest in that country, therefore FDI might increase.

However, FDI flows may not rise if fall is indicative of a lack of confidence in the country’s economy.

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