Author Question: Use a figure to explain how a balance of payments crisis and its hand in capital flight. What ... (Read 40 times)

TFauchery · **on:** Jun 30, 2018

Use a figure to explain how a balance of payments crisis and its hand in capital flight.

What will be an ideal response?

Question 2

Which of the following is FALSE about private savings and government savings?

A) SP = Y - T - C
B) Unlike private saving decisions, government saving decisions are often made with an eye toward their effect on output and employment.
C) Total savings (S) = SP + .
D) The national income identity can help us to analyze the channels through which government saving decisions influence macroeconomic conditions.
E) None of the above; all statements are true.

Qarqy · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Suppose the foreign exchange market expects the government to devalue the currency in the future and adopt a new fixed exchange rate > . This leads to a rightward shift in the curve that measures the expected domestic currency return on foreign currency deposits. Since the exchange rate remains fixed at , the domestic interest rate must rise to R + ( - )/ . The central bank must sell foreign reserves and shrink the money supply in response. This reserve loss accompanying a devaluation scare is labeled capital flight.

Answer to Question 2

E