Detailed answer 1. What are the advantages and disadvantages of devaluing the US

Question

Detailed answer

1. What are the advantages and disadvantages of devaluing the US dollar?,

2. How would a currency devaluation affect domestic prices and jobs?

3. Do you agree that the US will be better off in the future by pursuing a fair trade policy rather than a free trade policy? (Hint: A fair trade policy as is proposed by some politicians is to impose tariffs and taxes on imports, punish countries such as China for currency manipulation or at least force them to become part of the flexible exchange rate community).

Explanation / Answer

Devaluation refers to the lowering of the value of the currency in terms of other currencies.

The following are the advantages of devaluation.

1.Devaluation of dollar leads to reduction in the value of the exports. This makes US competitive in international market.

2. When exports from the country increase, the aggregate demand curve shifts to the right , leading to a higher rate of economic growth.

Disadvantages

1. This will lead to a higher value of the imports, This will create a lot of problem for the consumers.

2. Problem of inflation will prevail in the economy.

b. When a country devalues its currency, the value of exports is reduced and exports become cheaper in the world market. Due to this US willl gain a competitive advantage in the world and demand for exports will increase. This will increase jobs in the export oriented industries. Thus , unemployment will be reduced. But devaluation can lead to the problem of inflation if devaluation is achieved through increased money supply.

3. I think US will be better off if it follows a fair trade policy. This is because US and almost all the major countries are hit by the unfair trade policies followed by countries like China. Thus, a fair trade policy by US will force the countries like china to be fair and may help in improvement of the current account balance of many countries,

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