Imagine that you run a central bank in a floating exchange rate regime. Your current goal is to stabilize real GDP by ke
Posted: Sun May 29, 2022 7:48 pm
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.
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.