Answer to Question #211393 in Macroeconomics for Nehal Prrasad

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

Fiji’s dollar devaluation will raise import prices. This will stimulate higher demand for domestic goods. The increased demand will lead to no trade balance because the market for foreign goods will decline. There will be increased private consumption. The currency devaluation will lead to low-interest rates, which will, in turn, increase investment and income, thereby shifting the IS curve to the right.