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Presents an economic model of the South Vietnamese economy. The model assumes constant domestic production; no exports, regardless of the level of the exchange rate; a domestic price level determined by the size of the money stock; and no government deficit that cannot be reduced by monetary or fiscal policy. The model shows that, even without flexible monetary and fiscal policies, the South Vietnamese government could use U.S. dollar aid combined with an appropriate exchange rate policy to control inflation. Where there is excess demand for foreign exchange — a likely condition in South Vietnam — devaluation at least to the point of zero excess demand for foreign exchange will reduce or eliminate the inflationary impact of the fiscal deficit with no reduction in real imports and hence in real income. The model also indicates that a U.S. aid policy designed to control inflation would discourage excess demand for foreign exchange.
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