1. The central bank of Alumnia has decreased the money supply to fight inflation. How will...
1. The central bank of Alumnia has decreased the money supply to fight inflation. How will this affect the flow of financial capital in and out of Alumnia and consequently the value of its currency and its net exports of goods and services? explain !!!
Inflow of Capital Value of Currency Net Exports
a) No change No change No change
b) Decrease Depreciation Increase
c) Increase Appreciation Decrease
d) Decrease Appreciation Decrease
e) Increase Depreciation Increase
Homework Answers
Since the money supply has decreased, it means the interest rate in Alumnia has increased.
(A) Inflow of capital: It will increase because the interest rates in Alumnia has increased as compared to other countries, so foreign investors will invest more in Alumnia. So, there will be inflow of capital.
(B) Value of currency: It will appreciate. The domestic currency of Alumnia appreciates in relation to other countries because of capital inflow. Also because of rise in net exports.
(C) Net exports: It will increase. Because of interest rates, we will import less and export more, it will make net export to rise.
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