Question: Consider two countries C and D operating in a world with completely flexible exchange rates. Country C runs a substantial export surplus to country D,

Consider two countries C and D operating in a world with completely flexible exchange rates. Country C runs a substantial export surplus to country D, which experiences a substantial trade deficit. Assuming no initial offsetting capital flows, explain the adjustment process to bring the trade between the two countries into balance?

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To illustrate the operation of the adjustment process let us assume an initial relationship of 1 to 4 FC 1 FC4 Let us now assume that the volume of im... View full answer

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