EU As a Lender of Research Paper

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Question 2: Exports

One of the few 'good' things about an economic downturn is that it tends to increase the desirability of a country's exports and thus reduces the balance of payments to nations abroad in international trade. When a nation is spending at a deficit to stimulate its economy, this tends to decrease the value of that nation's currency. The cheapened value of the dollar, for example, means that the dollar is much less valuable in relation to other currencies in a flexible exchange rate system. Interest rates also tend to be lowered during a period of economic contraction, as they are now, to act as an incentive for individuals to borrow and spend more. This makes it more attractive for foreign companies to invest money in a nation, and to borrow money from the nation's central bank.

During an economic expansion, as citizens have more money, the balance of payments tends tip in the favor of imports, as wealthier workers buy more foreign as well as domestic goods.

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The central bank will usually raise the interest rate, to stem the tendency towards inflation. As the deficit of the nation will usually go down, at this time meaning the nation is less indebted to foreign creditors, the value of the currency will increase in relation to foreign currencies.

A fixed exchange rate, where the value of the currency is 'pegged' to the value of gold, will be less sensitive to such changes in the economy. Trade and investments are more stable, but this also makes the economy less sensitive to the ability of the central bank to stimulate or slow down the economy, as a lower or higher interest rate and greater liquidity do not drive down the value of the currency to the extent that they do with a flexible interest rate......

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