Abstract
The general theory of the balance of payments constructed in the previous chapter may, with little difficulty, be modified to become a general theory of exchange-rate determination. With flexible exchange rates, a position of equilibrium as represented by a point of intersection between IS and LM, which lies off the BP schedule will result in a change in the exchange rate. Where equilibrium occurs below BP, giving a payments deficit, the exchange rate will depreciate. Where it occurs above BP giving a payments surplus the exchange rate will appreciate.
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© 1998 Graham Bird
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Bird, G. (1998). Theories of Exchange-Rate Determination. In: International Macroeconomics. Palgrave Macmillan, London. https://doi.org/10.1057/9780230372290_5
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DOI: https://doi.org/10.1057/9780230372290_5
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-333-73401-8
Online ISBN: 978-0-230-37229-0
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