ABSTRACT
All the adjustment mechanisms discussed in Chapter 16 represent attempts to force the demand function shown in Figure 17.1 to shift to the left and the supply function to shift to the right, producing equilibrium at the historic fixed parity. As was suggested in that chapter, the domestic effects of the policies required to produce such demand and supply shifts are painful and may not be politically acceptable. It might be wondered why a government would even consider imposing such difficulty on its economy, when the option of an exchange rate change is readily available. If there is excess demand for foreign exchange, then the best policy is to raise the price (lower the exchange rate) to a level at which the excess demand disappears, which is a devaluation if the new rate is to be fixed.
