Suppose that a nation is at full employment without inflation but has a deficit in its...

Suppose that a nation is at full employment without inflation but has a deficit in its balance of payments.
1. Explain why a depreciation of the nation's currency will not correct the deficit unless real output
rises or domestic expenditures (absorption) fall.
2. How can the nation's output rise as a result of the depreciation?
3. How can domestic absorption fall automatically as a result of the depreciation?

4.	How can the government help reduce domestic absorption and make the devaluation effective?

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Expert Solution

Rahul Sunny answered 1 year ago

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