1. Imagine that you run a central bank in a floating exchange rate regime. Your current goal is to stabilize real GDP by

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1 Imagine That You Run A Central Bank In A Floating Exchange Rate Regime Your Current Goal Is To Stabilize Real Gdp By 1 (64.8 KiB) Viewed 36 times

1. Imagine that you run a central bank in a floating exchange rate regime. Your current goal is to stabilize real GDP by keeping it constant, and you control the money supply to do so. Using the open economy IS/LM model, what happens to the money supply, the interest rate, the exchange rate, and the trade balance (net exports) in response to each of the following shocks (illustrate the changes in the 3-pane diagram and then summarize your findings): (a) The president of your country raises taxes to reduce the budget deficit. (b) The president of your country restricts the import of foreign cars.