Kenya and Venezuela are major trading partners and the exchange rate between the Kenyan shilling and the Venezuelan bolivar is determined in a flexible foreign exchange market. A. Assume real income increased in Venezuela. Draw a correctly labeled graph of the foreign exchange market for the shilling and show the effect of increased real income in Venezuela on the equilibrium exchange rate for the shilling. B. Will each of the following increase, decrease, or remain the same as a result of the increase in Venezuelan real income? i. Kenya's net exports. Explain. ii. Unemployment in Kenya. Explain. iii. Kenya's long run aggregate supply. C. Assume instead household savings increase in Venezuela. Draw a correctly labeled graph of the loanable funds market in Venezuela and show the effect of the increase in household savings on the equilibrium real interest rate.
Kenya and Venezuela are major trading partners and the exchange rate between the Kenyan shilling and the Venezuelan bolivar is determined in a flexible foreign exchange market.
A. Assume real income increased in Venezuela. Draw a correctly labeled graph of the foreign exchange market for the shilling and show the effect of increased real income in Venezuela on the equilibrium exchange rate for the shilling.
B. Will each of the following increase, decrease, or remain the same as a result of the increase in Venezuelan real income?
i. Kenya's net exports. Explain.
ii.
iii. Kenya's long run
C. Assume instead household savings increase in Venezuela. Draw a correctly labeled graph of the loanable funds market in Venezuela and show the effect of the increase in household savings on the equilibrium real interest rate.
D. Based on the change in the equilibrium real interest rate identified in Part C, what will happen to financial capital flows to Venezuela?
E. Based on your answer to Part D, what will happen to the international value of the bolivar in the foreign exchange market? Explain.
F. Based on your answer to Part E, will Venezuela's central bank buy or sell shillings in the foreign exchange market to stabilize the bolivar/shilling exchange rate? Explain.
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