Answer to Question #209147 in Macroeconomics for Gray

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

The IS_LM_BP model describes how aggregate markets for real goods and financial markets interact to balance the rate of interest and total output in the macroeconomy. It further gives display that capital flows,are the determinants of trade deficits for stable international reserves. In correlation with the open economy,devaluation of Fiji dollar will deter investment, exports could rise because products would be cheaper and it will also substantially increase debt servicing charges as more Fiji dollar will be required to repay loans denominated in foreign currency. The income level will increase,as well as consumption and tax revenue but the interest rate remains constant. On the other hand,based on qualitative analysis; income is money received on regular basis through investment or work,trade balance refers to savings and investments,actors can either invest or save domestically or internationally, whereas interest rate is the amount a lender charges for the use of assets and finally private consumption is the measure of all the money spent by consumers in the country to buy goods and services,often called consumer expenditure, determined by the marginal decision of individual actors. Therefore assuming a perfect capital mobility that means an enormous quantity of fund transfer from one country to another when the rate of return on assets in one country is higher than another,the effect is that their will be availability of equal interest rates.

The adjustment process begins with focus on interest since its the major aim of trade. At lower interest rates, investment is higher. Income and interest rate where money supply equals money demand. Higher levels of income induce increased demand to hold money balances for transactions, which requires a higher interest rate to keep money supply and liquidity demand in equilibrium as per IS_LM_BP model.