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Consider an open economy with flexible exchange rates. Lets IP stand for the (uncovered) interest parity condition.

1. In an IS-LM-IP diagram, show the effect of a decrease in foreign output, Y*,on domestic output, Y. Explain in words.

2. In an IS-LM-IP diagram, show the effect of an increase in the foreign interest rate, j*,on domestic output, Y. Explain in words.

3. Do these two shocks (in a. And b.) have any different effects on the economy?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M91233432

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