A financial crisis is a form of a large, negative, temporary but
persistent demand shock in the money market such that costs of
borrowing unexpectedly increases for a given level of money
supply.
1. Assume flexible exchange rate system. Use the IS-LM-FX model
to illustrate the short-run effects of a financial crisis on
output, nominal interest rate, exchange rate and investment.
2. Suppose the goal of macro policy is to stabilize output in
the short run. What kind of fiscal...