Question

IS-LM-FX Model with Floating Exchange Rate [20 points 3 For each of the following situations use the IS-LM-FX model to illustrate, first, the effects of the temporary shock and then the policy response. (Note: Assume the central bank responds by using monetary policy to stabilize output (ie. to keep it at the initial equilibrium)) Label A the initial equilibrium, B the short-run equilibrium without policy response, and C the equilibrium after the response of the central bank. For each case, state the effect of the shock on the following domestic variables (increase, decrease, no change observe those changes: Y, i, E, C, I, TB. Assume a flexible exchange rate ambiguous) and explain why or we a All else equal, there is an exogenous decrease in the level of investment. [10 points b All else equal, the real demand of money falls. 10 points

Answer 1

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