Author Question: Suppose the country that pegs its currency has an overvalued real exchange rate and that output is ... (Read 106 times)

azncindy619 · **on:** Jun 30, 2018

Suppose the country that pegs its currency has an overvalued real exchange rate and that output is currently above the natural level of output. Which of the following will occur as the economy adjusts to this situation?

A) P will decrease over time until Y = Yn.
B) A reduction in the pegged value of the domestic currency will cause a leftward shift of the AD curve.
C) Net exports will increase as the economy adjusts to this situation.
D) Domestic goods will become less competitive as the economy adjusts by itself.
E) none of the above

Question 2

Graphically illustrate and explain the effects of a decrease in the saving rate on the Solow growth model. In your graph, clearly label all curves and equilibria.

What will be an ideal response?

meltdown117 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

D

Answer to Question 2

The decrease in s will cause a reduction in S/N and I/N. At the initial K/N, depreciation is more than investment. Alternatively, there is not enough investment to offset the amount of capital that wears out. So, the capital stock will decrease. This will cause a decrease in K/N, Y/N, and S/N. As Y/N falls, so will C/N. This is all shown easily with the graph of the model.