2009 Macroeconomics FRQ #2
(A) How will this decision by investors affect the international value of the Tara's currency on the foreign exchange market? Explain.
So, If I have my money in Tara, and all hell breaks loose. I will want to get my money out of the country super quick. I have to exchange my Tara currency for some other more stable currency to preserve the value of my money. So the FOREX will have many people trying to do this and therefore the supply of Taras' will increase in the FOREX, meaning that the value of the Tara will fall.
(B) Using a CLG of the loanable funds market in Tara, show the impact of the decision by investors on the real interest rate in Tara.
Understand that the loanable funds market is the graph of the amount of money in the commercial banks in Tara. If investors pull their money out of Tara then the supply of cash in Tara's banks must decrease.
The real rate will increase as the supply of loanable funds decrease.
(C) Given your answer in part (b), what will happen to Tara's rate of economic growth.
A rising interest rate will deter people from borrowing money. This will deter investment and consumption and therefore Tara's economic growth will suffer.
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