Answer to Question #85990 in Macroeconomics for Annie

Question

Suppose there are two groups, Group W and Group P:
 Group W: people in group W like to take financial risks, and therefore have a high tolerance for holding foreign assets
 Group P: people in group P do not like to take financial risks, and therefore do not hold any foreign assets
Now suppose there is an increase in inequality: Wealth shifts away from Group P and toward Group W, so that a larger share of wealth is held by Group W.
What effect would this increase in inequality have on the real exchange rate? On gross exports? Defend your answers.

Answer 1

The increase in the share of the population who invest in foreign assets provokes a chain of interrelated assets: (items should be considered in a specific order)

-outflow of currency abroad

-increase in the value of foreign assets

-as a result, the decline in the value of national assets in the global market

-reducing the stability of the national economy

-reducing the value of goods manufactured by the national economy

-actual exports may remain at the same level, but due to lower costs, foreign currency inflows will decrease

-as a result, the decline in the value of the national currency in comparison with foreign currencies