6 economics

6. A devaluation We are in 1967 and the French economy is on a fixed exchange rate system under the Bretton Woods arrangement (extremely low capital mobility with this regime). All the currencies are fixed to the US dollar and the French exchange rate is F4/$. Unfortunately, with this exchange rate France is running chronic current account deficits. Is the French Franc too weak or too strong? Show the impact on the $ currency market in Paris. Show the fixed exchange rate on your graph and the imbalance on the currency market (name all the axes and curves). What does France have to do to try to support the Franc? What is the impact of this situation on the French foreign reserves. The IMF would allow countries facing such situation to adjust their peg: what will France do? Devaluation or revaluation. How do you describe the kind of devaluation/revaluation that France needs to carry out to restore equilibrium in the French balance of payment? Will this action stimulate the French economy? Yes or no Show the original situation for France on the IS-LM-BP graph below and the actions of the French central bank (described above) - name all the axes and curves