ISLMFX Model with flexible exchange rates
Question # 00523462
Posted By:
Updated on: 05/07/2017 02:32 AM Due on: 05/07/2017
ISLMFX Model with flexible exchange rates
Suppose in an economy, there is an exogenous fall in export demand for home goods. Answer the following questions using the ISLMFX model.
What happens to the IS schedule?
Why? Explain.
What happens to the LM schedule?
Why? Explain.
What happens to the equilibrium output after the change?
What happens to the equilibrium interest rate after the change?
What happens to the exchange rate after the change?
Why? Explain.
What happens to the consumer spending after the change?
Why? Explain.
What happens to the investment spending after the change?
Why? Explain.
What happens to the trade balance after the change?
Why? Explain.
Suppose in an economy, there is an exogenous fall in export demand for home goods. Answer the following questions using the ISLMFX model.
What happens to the IS schedule?
Why? Explain.
What happens to the LM schedule?
Why? Explain.
What happens to the equilibrium output after the change?
What happens to the equilibrium interest rate after the change?
What happens to the exchange rate after the change?
Why? Explain.
What happens to the consumer spending after the change?
Why? Explain.
What happens to the investment spending after the change?
Why? Explain.
What happens to the trade balance after the change?
Why? Explain.
ISLMFX Model and Stabilization Policy
Suppose the fiscal authority of an economy implements expansionary policy. Specifically, the government introduces a lumpsum tax cut.
Suppose also that this country has a credible fixed exchange rate regime and, following the tax cut, central bank uses monetary policy to maintain the peg.
Suppose the fiscal authority of an economy implements expansionary policy. Specifically, the government introduces a lumpsum tax cut.
Suppose also that this country has a credible fixed exchange rate regime and, following the tax cut, central bank uses monetary policy to maintain the peg.
a. Consider the graphical illustration of the ISLMFX model and answer the following questions comparing the initial equilibrium before
any change was implemented to the equilibrium that prevails after all the policy changes are implemented.
What happens to the consumer spending? Why? Explain. What happens to the investment spending? Why? Explain. What happens to the trade balance? Why? Explain.
any change was implemented to the equilibrium that prevails after all the policy changes are implemented.
What happens to the consumer spending? Why? Explain. What happens to the investment spending? Why? Explain. What happens to the trade balance? Why? Explain.
B) Assume, instead, that the country has floating exchange rates. Suppose that following the tax cut, the central bank decides to pursue an output stabilization policy. Comparing the initial equilibrium before any change was implemented to the equilibrium that prevails after all the policy changes are implemented:
What happens to the consumer spending?
Why? Explain. What happens to the investment spending? Why? Explain. What happens to the trade balance? Why? Explain.
What happens to the consumer spending?
Why? Explain. What happens to the investment spending? Why? Explain. What happens to the trade balance? Why? Explain.
-
Rating:
/5
Solution: ISLMFX Model with flexible exchange rates