please compare and explain the IS-LM curve in a closed economy and a small open economy

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Expert Solution

In a closed economy, IS curve being a goods market equilibrium would be Y= C+I+G and under open market economy would have a steeper slope compared to closed economy because now a major portion of income is spend on foreign goods and services hence increase in income would not have a larger impact on demand for domestic goods compared to closed econony. Any rise in net exports would shift the IS curve to the right.

For the LM curve which gives money market equilibrium, in a closed economy implies that as income increases leading to increase in money demand, given money supply is fixed would increase rate of interest to balance money demand. It is an upward sloping curve. For a small open economy where its imports doesnot have any impact on world trades and doesnot constitute a major demand in world imports means it takes world interest rate as given would be flatter compared to closed economy.

Rahul Sunny answered 1 year ago

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