supply of foreign currency, which implies a higer price for local currency relative to foreign currency. b.Long term deificits self correct as price signals decrease demand for imports (decrease in purchasing power of the deficit nations). 2.Trade deficits with nations who have currencies pegged to a non local currency should result in a misallocation of aggregate demand. a.Locals who produce goods in one nation are paid in local currency and the firm who employes them is paid in a foreign currency, but that firm is obligated to exchange to local currency at a fixed rate by the local government (which they must do to get local currency to pay employees, so even if they think they are not getting enough for their foreign currency, they have little choice). i.The local surplus government will end up with foreign currency with which they can buy foreign government bonds (temporary decrease in foreign aggregate demand), they can buy foreign assets (aggregate demand resulting in local asset inflation), they can exchange for other currencies (decreases the foreign currency relative to a second currency, decreasing purchasing power) or they can buy foreign currency priced commodities (producer price inflation in foreign currency). ii.The local government will manage local aggregate demand through local currency tax policy, local currency debt issuance and the fixed exchange rate between the foreign currency and the local pegged currency. b.Long term deficits exist only if the local currency purchasing power remains cheap relative to foreign currency purchasing power. i.A policy to buy