Consider a flexible exchange regime with highly immobile capital (i.e., the BP curve is steeper than the LM curve). Draw appropriate curves, labeling them IS1, LM1, and BP1. Label equilibrium income Y1 and the equilibrium interest rate i1.
Graph the following curves by clicking here
Suppose the government decides to “cool off” the economy by pursuing contractionary fiscal policy. How do the IS and BP curves shift? Draw and label the new curves. Label the new levels of income and the interest rate Y2 and i2.
Comment on the effectiveness of fiscal policy in this case. Under what circumstances might fiscal policy be more effective?
Consider a flexible exchange regime with highly immobile capital (i.e., the BP curve is steeper than the LM curve). Draw appropriate curves, labeling them IS1, LM1, and BP1. Label equilibrium income Y1 and the equilibrium interest rate i1.
Graph the following curves by clicking here
Suppose the government decides to “cool off” the economy by pursuing contractionary monetary policy. How do the IS, LM, and BP curves shift? Draw and label the new curves. Label the new levels of income and the interest rate Y2 and i2.
Comment on the effectiveness of monetary policy in this case.
This question involves the effects of a foreign price shock in the case of a flexible exchange rate regime.
Graph the following curves by clicking here
Create a graph, labeling the horizontal axis Y and the vertical axis i.
Graph the IS, LM, and BP curves assuming the capital is relatively mobile. Label these IS1, LM1, and BP1, respectively. Label the equilibrium values of income and interest rate as Y1 and i1.
Suppose foreign prices fall (this situation occurred in the 1990s in Japan). How will this affect the BP curve? How will this affect the IS curve? Label the new curves BP2 and IS2.
Will the currency appreciate or depreciate? Explain.
What will be the ultimate effect of this foreign price shock on this country’s level of income and interest rate?
