Question

You are working as the chief economist for the Ministry of Economy in Peru. For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, TB. Assume the government allows the exchange rate to float and makes no policy response

.a. Peru's main trading partner, China, enters into a recession. China's output decreases.

b. Investors expect a depreciation of the Sol, the Peruvian currency

c. The money supply in Peru increases

.d. Peruvian government increases government spending.

Answer 1

china's output decreces CC. china output decreases then y increase, i (Decreased) E (increases), c(Decrease), I (increases), IB(increase of IS SHIFT (LEFT) DR SKP DOWN 6 depreciation of sol (home curreny) ☺ money the optimal 4 (increases) is increases), c increases) cc increases) I Decreased) TB (incretes) Ex (Right Shy) 155 DRSHund Money supply in pere increase 80 ) (Decreased (tren cinc )(cal ITB (merears) Et

Gort spending increases) E, to Is shift (upward) Right DR Shift (up) y Cinereares) Vi increases) E (Decreases) clmcreases) I (Decreases) TB (Deereases