5. (a) “A country with a deficit in its official settlements balance runs the risk of increasing inflation if it defends

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5 A A Country With A Deficit In Its Official Settlements Balance Runs The Risk Of Increasing Inflation If It Defends 1 (13.94 KiB) Viewed 22 times

5. (a) “A country with a deficit in its official settlements balance runs the risk of increasing inflation if it defends its fixed exchange rate by unsterilised official intervention in the foreign exchange market." Is this statement true or false? Explain why. [50 marks] (b) Country XYZ is worried that business cycles in other countries may disrupt its own economy. It would like some "insulation from foreign business cycles. Should this country favour adopting a floating exchange rate or a fixed exchange rate? Explain why. [50 marks]