In the situation in Question #13 above, during exchange-rate adjustment process that takes place due to the incipient imbalance in the external sector,

Question

Quizplus · Accepted Answer

During exchange-rate adjustment process, incipient imbalance in the external sector causes a shift in the BP curve to the left (or vertically upward). This is because the imbalance creates increased demand for foreign currency, which leads to a decrease in the equilibrium exchange rate. As a result, exports become more expensive and imports become cheaper, helping to correct the external imbalance. The shift in the BP curve also affects the equilibrium point, causing a movement along the IS curve to a new equilibrium point with a lower level of output but a lower trade deficit. The LM curve is not directly affected by the exchange rate adjustment process.

In the Situation in Question #13 Above, During Exchange-Rate Adjustment