Venus Island is a small open economy with perfect capital mobility. The goods market, exchange rate...
Venus Island is a small open economy with perfect capital mobility. The goods market, exchange rate market and money market is in equilibrium when aggregate income/output is Y1, exchange rate is e1 and interest rate r1. Then the government implemented a contractionary fiscal policy.
a. Use Mundell-Fleming model to show and explain, by referring to the events in the each of the markets, the predicted effects of the income tax increase. Assume that Venus Island uses a floating exchange rate.
b. If the country used a fixed exchange rate, explain how the equilibrium on IS*- LM* market will change.
c. If Venus country was in a recession and wanted to use a combination of (discretionary) fiscal policy and monetary policy to stimulate GDP, which exchange rate type will this be feasible and why?
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Venus Island is a small open economy with perfect capital
mobility. The goods market, exchange rate...
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