Answer to Question #208926 in Macroeconomics for Anisha Kumar

Question

Develop a qualitative analysis on income, interest rate, trade balance, and private consumption using the IS-LM-BP model if the Fiji dollar was devalued. Assume perfect capital mobility. Carefully discuss the adjustment processes. 

Answer 1

If the Fiji dollar were devalued, it would stimulate a high price of imports, stimulating high demand for domestic goods. The market for foreign goods will decline; hence no trade balance in Fiji's economy. There will also be decreased interest rates and increased private consumption due to increased aggregate demand. The low-interest rates will increase investment and income, thereby shifting the is curve to the right.