Answer to Question #70029 in Macroeconomics for Emina

Question

Why and how does increase in private saving or decrease in government spending lead to depreciation of exchange rate? Doesn't increase in savings lead to decrease in import and decrease in import leads to decrease in country for foreign currency and that leads to appreciation? Thanks

Answer 1

Decrease in government spending means that less money is available for spending by population. Therefore, they consume less. This leads to a decrease in import. Less import means less demand for e foreign currency and improves trade balance. Therefore, this leads to depreciation of an exchange rate.