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Suppose that a small open economy suddenly experiences a violent political upheaval. Explain what will happen...

Suppose that a small open economy suddenly experiences a violent political upheaval. Explain what will happen to its interest rate, equilibrium nominal exchange rate, and output. Use a graph to illustrate your answer.

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Answer #1

Political turmoil plays a very crucial role in an eco8. It not only creats economical blockage but also slows the growth.

When economy experience violent political upheaval ( one such happens during industrial revolution) the interest rate tends to rise and effects money circulation process.

Not only that value of domestic currency falls compare to that of foreign and due to which exchang rate rises.

Output falls as production hampers which slows growth process.. fall in output leads to rise in price level too

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