Answer to Question #213934 in Macroeconomics for kajal

Question

1.     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 depreciation of the Fiji dollar will raise import prices, resulting in increased demand for domestic goods. There will be no trade balance since imported items will shrink as people want more domestic goods. Low borrowing rates and more private consumption will result from the currency's low value. Low-interest rates will boost investment and income, causing the IS curve to shift to the right.