¶ … supply and demand curve, why Argentina had to give up fixed exchange rate in 2001 Demand and supply are normally directly proportional which means as demand of a product increases, its supply normally increases too. In the case of Argentina which had fixed exchange rate till 2001 but had to give that up, demand and supply principles came into play in different ways. For one, we must understand how demand of anything would affect exchange rate. When Argentina's economy was prospering and its products were in high demand, it was primarily because of those products were cheaper for other markets. However as soon as the demand reached a certain point, fear of overvaluation of currency also emerged which means that when it was felt that Argentina products were becoming expensive in the foreign markets not because the prices had been changed but...

With changes in exchange rate against dollar, Argentinian products became less popular and its exports decreased. This means that with lower demand, supply had to be curtailed too. This led to a budget deficit which means that the country now did not have enough revenue coming in to fund all its ventures repay its debt and take care of its other financial liabilities.
This also meant that now foreign exchange was no longer coming in as rapidly or in the same amount as before. When foreign exchange reserves began depleting, this only meant one thing: peso was about to lose its value. When pegged against dollar, as in most fixed exchange rate economies, foreign exchange depletion can cause devaluation of local currency. For this reason in 2001, the government decided to give up fixed…