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Read the case study below and answer the questions. SHORT RUN STABILIZATION AND LONG RUN COMPETITIVENESS: THE LAVITAN CASE Gr

The Baltic Tiger crashed, and it crashed hard. The most rapidly developing economy among the EU countries, experiencing a d

As an alternative to external devaluation, Latvian politicians have started to talk about an internal devaluation: keeping

In addition, in 2009 Latvia ranked 45 out of 179 countries according to the economic freedom index acknowledging the country

please help with a detailed, fully explained answer for Question 2. thank you

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Answer #1

Solution 2.1

Latvian government needs to pursue smooth to moderate devaluation of 5 to 10 percent range which revives exports and thus forex reserves grow exponentially lowering furrent account deficits and also leading to currency stabilisation. The forex kitty thus helps stability when excessive depreciation or appreciation takes place. Moreover to revive economic growth with fiscal policy tools at helm, the government has to make structural reforms than cyclical reforms. Here each downgraded sectir needs to be revived using liquidity injection, tax credits and ease of doing business. Moreover government needs to adopt external commercial borrowing to fund these projects and debt refinancing of existing loans to adhere to fiscal discipline and same time disinvestment of public sector companies in virtue of achieving budget surpluses.

Solution 2.2

The above revival methodology proposed confronts bottlenecks and headwinds like global uncertainty, lack of Monetary policy congruency which navigates economy in similar direction, lack of easy availability of foreign loans at cheaper interest rates due to low sovereignty rating of Lavian economic growth.

Moreover, challenging times like implementation lag and high tax rebates will cause breach of fiscal deficit and create budget deficits as taxes are usually evaded in recession and slowdowns and thus the revenue targets may get a miss creating catch 22 situation where it xan lead to stagflation as well.

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