IV. Flexible exchange rates and foreign macroeconomic events
Consider an open economy with flexible exchange rates. Let UIP
stand for the uncovered interest parity condition.
a. In an IS-LM-UIP diagram, show the effect of an increase in
foreign output, Y*, on
domestic output, Y. Explain in words.
b. In an IS-LM-UIP diagram, show the effect of an increase in
the foreign interest rate, i*, on domestic
output, Y. Explain in words.
c. What effect is a foreign fiscal expansion likely...