Chapter 14, Problem 3SQ

What effect will the depreciation of the rand have on the demand for foreign goods?

Under which of the following would devaluation be unseuccesful? Select one: a) Domestic prices remain stable b) Inflation occurs c) Other countries do not retaliate d) The demand for imports is elastic e) Domestic prices fall

Peru is growing relatively quickly and has begun to attract large inflows of foreign direct investment. While Peru relishes the benefit of the inflows, it is concerned about the potential negative effects if the foreign investors pull out their investments quickly. One particular reason for Peru to be concerned is that its banks have taken out large loans denominated in U.S. dollars and European euros from foreign banks. If the foreign direct investment is withdrawn quickly from Peru, what will be the effect on each of these items? A. Peru's money supply - B. Peru's exchange rate with other countries - C. Peru's exports - D. Peru's trade deficit -   Answer Bank:   No Effect, Increase or Decrease