Define devaluation and use a figure to show the effect of a ...

[humphriesbr@me.com]

Define devaluation and use a figure to show the effect of a currency devaluation on the economy.
 
  What will be an ideal response?

Question 2

Government transfer payments like social security and unemployment benefits are
 
  A) included in government purchases.
  B) not included in government purchases.
  C) not included in government purchases, but they are included in the consumption component of GNP.
  D) not included in government purchases, but they are part of the investment component of GNP.
  E) included in government purchases but not in the GNP.

[af]

Answer to Question 1

A devaluation occurs when the central bank raises the domestic currency price of foreign currency. In the figure, the domestic currency is devalued from to . Since nothing in the DD schedule has changed, the new equilibrium at point 2 must be reached by an expansion of the money supply (AA curve shifts outward). Notice also that output has increased from to .

Answer to Question 2

B

[humphriesbr@me.com]

Excellent

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