In: Economics
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? |