Macro Economics Essay Example | Topics and Well Written Essays - 500 words

Macro Economics - Essay Example b) In an economy with a fixed exchange rate, the government or the central bank interfere through buying and selling of foreign currency to maintain a fixed exchange rate. However, a continuing current account deficit may propel the central bank to devalue the currency. The managed exchange rate regime of China is not a floating one. In spite of the huge current account surplus of China, the government and the central bank of China have not allowed the exchange rate of Chinese â€Å"yuan† to appreciate in spite of the upward pressure on the currency. 2. The BP or â€Å"FE† curve was first given by Robert Mundell of Columbia University and Marcus Fleming of the International Monetary fund. This curve explains the effect of monetary policy and fiscal policy on the exchange rate of an open economy. According to the BP curve analysis, an increase in government spending or fiscal expansion leads to an increase in output, an increase in interest rate, an appreciation in the f oreign exchange rate and vice-versa. Similarly a monetary contraction leads to a decrease in output, increase in interest rate and appreciation in the exchange rate.