Under a system of fixed exchange rates, the process of correcting current account deficits by price and money supply adjustments is called
A)the Keynesian adjustment process
B)the Bretton Woods adjustment process
C)the classical adjustment process
D)the J-curve effect
E)the hysteresis effect

Question

Quizplus · Accepted Answer

The process of correcting current account deficits by price and money supply adjustments is called the classical adjustment process. Under a fixed exchange rate system, if a country has a current account deficit, it means that it is importing more than it is exporting, which will lead to a decrease in the country's foreign reserves. To correct this deficit, the country will have to increase the prices of its exports and decrease the prices of its imports, which will lead to an increase in exports and a decrease in imports, thereby reducing the current account deficit. This adjustment process is based on classical economic theory, which emphasizes the role of price adjustments in restoring equilibrium in the economy.

Under a System of Fixed Exchange Rates, the Process of Correcting