Answer to Question #214585 in Macroeconomics for Annah

Question

What happens to BOP (trade balance), interest rates and private consumption when there is a currency devaluation assuming perfect capital mobility

Answer 1

Currency devaluation lowers the value of country's currency compared to that of other countries. This makes exports cheaper and imports expensive hence trade balance is positive as exports will exceed imports. Interest rates becomes low making the loans to be cheaper.This then increases the private consumption.