Answer to Question #286895 in Macroeconomics for unknown

Question

In your opinion, does currency depreciation solve the economic problems of a country? Justify your answer.

Answer 1

Solution:

Currency depreciation does not solve the economic problems of a country.

 

Currency depreciation can only help to increase a country’s balance of trade by enhancing the competitiveness of domestic goods in foreign markets while making foreign goods less competitive in the domestic market by becoming more expensive.

Currency depreciation may dampen investor confidence in the country’s economy, thus damaging investment opportunities. It might also lead to an increase in aggregate demand, thus resulting in demand-pull inflation.