Which demand-side policy, monetary policy or fiscal policy, should be implemented in order for a country to improve the strength of its currency?

Economics Dec 15, 2020

Expert Solution

In the IS LM BP model, under fixed exchange rate, fiscal policy is more effective in raising income. this means trade surplus as IS shifts rightwards and point above the BP curve-- forex reserves rise, money supply rises, interest rate declines, incomes rise and hence exchange rate appreciates. Under flexible exchange rate, monetary policy is effective in raising income-- trade surplus, exchange rate appreciates.

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