Answer to Question #209787 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 devaluation of the Fiji dollar will raise the prices of imports, thereby stimulating high demand for domestic goods. There will be no trade balance because the market for foreign goods will decline as people will demand more domestic products. The low value of the currency will also lead to low-interest rates and increased private consumption. The low-interest rates will increase investment and income, thereby shifting IS curve to the right.