Question

in a typical balance of payments crisis part 2 a. the interest parity curve shifts out. b. the interest parity curve shifts in. c. exchange rate expectations are constant. d. real money supply must rise.

Answer 1

In a typical balance of payments crisis part the interest parity curve shifts in. Capital exodus results from downward pressure on interest rates, whereas imports rise as income levels rise.

As a result, the exchange rate depreciates, moving the BP curve to the right. The I and Y combinations that result in balance of payments equilibrium are provided by the BP curve. A given domestic price level, a certain currency rate, and a specified net foreign debt are used to build the BP curve. When the capital account deficit equals the current account surplus, equilibrium has been reached. Interest rates between two countries must be equal for interest rate parity to persist in a fixed exchange rate regime.

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