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

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

Compare the Closed-Economy IS-LM model, an Open-Economy IS-LM-BP model in which exchange rates are allowed to...

Compare the Closed-Economy IS-LM model, an Open-Economy IS-LM-BP model in which exchange rates are allowed to float freely, and an Open-Economy IS-LM-BP model in which exchange rates are held constant by the central bank. Specifically, use the three models to explain, and compare, the effects on GDP, interest, and the exchange rate of the national currency of: a. A sudden increase in government expenditures. b. A sharp increase in the discount rate and a massive sale of Treasury bonds by...

IS-LM Model (Closed Economy) The following equations describe a small open economy. [Figures are in millions...

IS-LM Model (Closed Economy) The following equations describe a small open economy. [Figures are in millions of dollars; interest rate (i) is in percent]. Assume that the price level is fixed. Goods Market C = 250 + 0.8YD YD = Y + TR – T T = 100 + 0.25Y I = 300 – 50i G = 350; TR = 150 Money Market L = 0.25Y – 62.5i Ms/P = 250 Goods market equilibrium condition: Y = C +...

1) Analyze and explain the IS* and LM * curves in the small open economy under...

1) Analyze and explain the IS* and LM * curves in the small open economy under the fixed and flexible ( floating ) exchange -rate system. Explain in detail the assumptions of the Mundell-Fleming Model, its limitations, and explain what occurs to the models variables as the economy moves from the short term ( when price is fixed) to the long term ( when price is flexible). Include diagrams of the appropriate economic models in your answer.

Compare the effect on GDP of an adverse demand shock in the closed and open economy...

Compare the effect on GDP of an adverse demand shock in the closed and open economy cases using graphs based on the open economy IS-MP model. Assume flexible rate.

How does the demand multiplier in the open economy compare with the one in the closed...

How does the demand multiplier in the open economy compare with the one in the closed economy (smaller, bigger or the same)? Explain briefly.

using an IS-LM-FE diagram as an aid, show the effect on a small open economy of...

using an IS-LM-FE diagram as an aid, show the effect on a small open economy of a permanent increase in the full-employment level of output. assume flexible exchange rates and assume that the domestic interest rate does not deviate from the foreign interest rate. explain what happens to output, the price level, net exports, the nominal exchange rate, and the real exchange rate. ( Please provide your answer in word format. not in your handwriting)

Use the IS-LM model of a closed economy to explain and graphboth the short run effects...

Use the IS-LM model of a closed economy to explain and graphboth the short run effects and the long-run effects of an increase in the money supply on national income, interest rate, investment, and the price level.

Using the IS-LM-FE model for a small open economy, analyze the effects of a contractionary monetary...

Using the IS-LM-FE model for a small open economy, analyze the effects of a contractionary monetary policy on output and the real interest rate in the short run and the long run. In each case, discuss the differences between the classical and the Keynesian models.

IS-LM closed economy – SR The Economy of North Haverbrook is described by the following agents...

IS-LM closed economy – SR The Economy of North Haverbrook is described by the following agents and characteristics. consumers C = 50 + 0.85 (Y-T) (taxes) T = 100 (government expenditures) G = 100 (investments) I = 500 – 50r (money supply) M = 3,000 (price levels) P = 1 (money demand) L (r,Y) = Y – 10r (potential output) Y* = 3200 The goods and services markets in equilibrium is described as: Y = AE, where AE = C...

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy.

Explain why government budget deficits crowd out private investment spending in a closed economy, but crowd out net exports in a small open economy. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy

Question