Must export a larger volume of goods and services to finance a given level of imports from Japan

Instability. Freely fluctuating exchange rates may also have destabilizing effects upon the domestic

Economy of a nation as wide fluctuations stimulate and then depress those industries producing

Internationally traded goods.

This is so for two reasons. First, the net exports component of aggregate expenditures will increase

And cause demand-pull inflation. Second, the prices of all imports will increase. Conversely,

Appreciation of the currency would lower exports and increase imports, tending to cause unemployment.

Looked at from the vantage point of policy, acceptance of floating exchange rates may

Complicate the use of domestic fiscal and monetary policies in seeking full employment and price

Stability. This is especially so for those nations whose exports and imports may amount to 20 to

Percent of their GDPs (Germany, Great Britain, Canada, Netherlands, New Zealand, etc.).

Fixed Exchange Rates (Part III)

At the other extreme nations have often fixed or “pegged” their exchange rates in an effort to

Circumvent the disadvantages associated with floating rates.

As demand and supply shift over time, government must intervene directly or indirectly in the