Question

Suppose first that the spread of Coronavirus decreases consumers' expectations about their future income decreasing the overall level of their consumption How does this shift affect the real exchange rate and the trade balance? Use a diagram to draw the curve shift resulting from this event and highlight its consequences on the equilibrium outcome.

Answer 1

1. Due to the coronoavirus expectations of consumer may decrease
2. The balance of trade impacts currency exchange rates as supply and demand can lead to an appreciation or depreciation of currencies. A country with a high demand for its goods tends to export more than it imports, increasing demand for its currency.
3. 
   shifts to the right with an increase in savings or decline in investment The Real Exchange Rate shifts to the right with an exogenous increase in exports, an exogenous decrease in imports or a decline in income СВ CBO Св The Current Account Balance Savings minus Investment A fall in Q (decline in the relative price of domestic goods) increases exports relative to imports and increases the current account balance