Answer to Question #214690 in Macroeconomics for Anonymous

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 dollar devaluation will lower the value of the country's currency compared to that of other trading countries. This makes exports cheaper and imports expensive hence trade balance is positive as exports will exceed imports. Interest rates will become low, making the loans to be cheaper. The low interest rates will then increase private consumption. The low-interest rates will increase investment and income, thereby shifting IS curve to the right.