Question

If lower exchange rate spurs exports then why wouldn’t it be a good idea of policy
makers to intervene to push the exchange rate as low as they can. Discuss

Answer 1

Lower exchange rate really spurs exports and the total business activity in the economy. But it wouldn’t be a good idea of policy makers to intervene to push the exchange rate as low as they can, because very low rates and fast increase of business activity will cause the increase of inflation level, which is not good for the economy and may create the inflationary gap. That's why exchange rate should not be as low, as possible.