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In: Economics

IV. Flexible exchange rates and foreign macroeconomic events Consider an open economy with flexible exchange rates....

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 to have on foreign output, Y*, and on the foreign interest rate, i*? What effect is a foreign monetary expansion likely to have on Y* and i*?

d. Given your answers to parts (a), (b), and (c), how does a foreign fiscal expansion affect domestic output? How does a foreign monetary expansion affect domestic output? (Hint: One of these policies has an ambiguous effect on output.)

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Rahul Sunny answered 2 years ago
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