Answer Happy

2. Suppose that a central bank (CB) aims inflation targeting for price stability with Ar= 0) under the flexible exchange rate regime. Further assume that there is trade and budget balance (NX = 0 and T = G), output is at its natural level (Y= Yn), domestic interest rate equals foreign interest rate (i = i), real interest and exchange rates equal their nominal values (r= i, e = E). If the foreign interest rate i increases how would change the exchange rate E, output Y, interest rate i, net export NX and budget B? Use IS-LM-UIP-PC model (15). IS: Y = C(YT)+1(Y, i) + G + NX(Y,Y*,E) E = LM:i=T 1 + i 1 + i -Ee