Author Question: Explain exchange rate crisis. What will be an ideal response?[br][br][b][color=green]Question ... (Read 57 times)

corkyiscool3328 · **on:** Jun 30, 2018

Explain exchange rate crisis.

What will be an ideal response?

Question 2

Suppose policy makers wish to increase steady state consumption per worker. Explain what must happen to the saving rate to achieve this objective.

What will be an ideal response?

bulacsom · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Exchange rate crisis typically start when participants in financial markets believe a currency may soon be devalued. Defending the parity then requires very high interest rates, with the potentially large adverse macroeconomic effects. These adverse effects may force the country to devalue, even if there were no initial plans for such a devaluation.

Answer to Question 2

it depends Whether the saving rate must increase, decrease, or remain constant depends on what the current saving rate is compared to the golden rule saving rate. If s < sg, the saving rate must increase to increase steady state consumption. If s > sg, the opposite must occur.