Suppose that a nation is at full employment without inflation but has a deficit in its balance of payments.(a)Explain why a depreciation of the nation's currency will not correct the deficit unless real output rises or domestic expenditures (absorption)fall.(b)How can the nation's output rise as a result of the depreciation? (c)How can domestic absorption fall automatically as a result of the depreciation? (d)How can the government help reduce domestic absorption and make the devaluation effective?

Question

Quizplus · Accepted Answer

The Answer of Suppose that a nation is at full employment without inflation but has a deficit in its balance of payments.(a)Explain why a depreciation of the nation's currency will not correct the deficit unless real output rises or domestic expenditures (absorption)fall.(b)How can the nation's output rise as a result of the depreciation? (c)How can domestic absorption fall automatically as a result of the depreciation? (d)How can the government help reduce domestic absorption and make the devaluation effective?

Suppose That a Nation Is at Full Employment Without Inflation