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3 BREXIT: The financial risk increases significantly when the UK decide to leave the European Union....

3 BREXIT:

The financial risk increases significantly when the UK decide to leave the European Union. Use IS-LM model to analyze how the risk shock affects the real interest rate and the GDP in UK.

Solutions

Expert Solution

In UK, Brexit will increase financial risk that will lead to an erosion of investment confidence. Investors will lower investment in UK, which will shift the IS curve leftward, lowering both real interest rate and GDP.

In following graph, initial equilibrium is at point A where IS0 and LM0 intersect with initial interest rate r0 and initial output Y0. As IS0 shifts left to IS1, it intersects LM0 at point B with lower real interest rate r1 and lower output Y1.

Rahul Sunny answered 2 years ago
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