When policy makers decide to devalue the currency, such an action ...

[bobypop]

When policy makers decide to devalue the currency, such an action generally represents
 
  A) a decision to let the currency float.
  B) an increase in the pegged value of the domestic currency.
  C) a reduction in the foreign price level.
  D) a reduction in the domestic price level.
  E) none of the above

Question 2

Suppose the saving rate is greater than the golden rule saving rate (sG). First, explain what must happen to the saving rate in order to increase steady state consumption. Second, what are the advantages and disadvantages of this policy to increase steady state consumption.
 
  What will be an ideal response?

[jessicaduplan]

Answer to Question 1

D

Answer to Question 2

The saving rate must decrease. This will cause an initial increase in consumption per worker. As the economy responds to this reduction in s, K/N and Y/N will fall. In fact, C/N will rise (as long as the drop in s does not go past the golden rule rate) as well and eventually exceed its initial level. The advantage of such a policy is that it will increase C/N initially and in the long run (given the previous qualifier). The are few if any disadvantages. It is possible to cut s too much (this has not been discussed here).

[bobypop]

Thank you

[jessicaduplan]

No problemo