International Business

A devaluation of the official exchange rate under conditions of less than full employment lowers. The current account balance increases, increasing aggregate demand and shifting IS to the right. Given a fixed exchange rate and less than full employment, small-open-economy equilibrium is determined by the intersection of the IS curve and the ZZ line(Nenovsky: 164-169). The rightward shift of the IS curve resulting from a devaluation of the nominal exchange rate and corresponding reduction in Q leads to an increase in output and employment. As output rises in Equation 2 at the given world real interest rate, the quantity of ...