Many Countries Deliberately Intervene in the Foreign Currency Markets in an Attempt

question 45

Essay

Many countries deliberately intervene in the foreign currency markets in an attempt to manipulate the value of their own currency.How is a country able to devalue its currency? What is one advantage and one disadvantage of this type of intervention?

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Definitions:

Long-Run Phillips

An economic concept suggesting that there is no long-term trade-off between inflation and unemployment, contrary to the short-run Phillips curve.

Monetary Neutrality

The concept that changes in the money supply only affect nominal variables, like prices, not real variables like output or employment in the long term.

Classical Dichotomy

The theoretical separation of nominal and real variables

Short-Run Phillips

A theoretical framework that implies a short-term inverse correlation between inflation rates and unemployment levels.