Exhibit: IS*–LM* and AD A small open economy with a floating exchange rate is initially in...
Exhibit: IS*–LM* and AD
A small open economy with a floating exchange rate is initially in
equilibrium at A with IS1*,
LM1*. Holding all else constant, if the
domestic price level increases, then the _____ curve will shift to
_____.
A. IS1*; IS2*
B. IS1*; IS3*
C. LM1*; LM2*
D. LM1*; LM3*
Homework Answers
D. LM1*; LM3*
This is because, holding the nominal MS constant, rising prices decrease real money balances, which we know shifts the LM curve to the left.
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Exhibit: IS*–LM* and AD
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