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Equilibrium market rate & Undervalued currency

Question:

a. In the short-run, it is easier for a country to maintain a peg that undervalues a currency (relative to the equilibrium market rate) than it is to maintain a peg that overvalues the currency (relative to the equilibrium market rate).
Explain Why?

Answer:

An undervalued currency will help a country to promote and increase its exports, as the exchange rate is lower than the market equilibrium; resulting in lower prices of exports than the ideal export prices. At the same time, imports are costlier, so the net exports increases. In case of an overvalued currency, net exports will fall and the trade deficit will increase.

 

 

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