1
Lesson 66
1
Monetary Policy with Flexible Exchange
Rates
Suppose again that the economy is in an
equilibrium with excessive unemployment
Can monetary policy be used effectively to
stimulate output?
This lesson incorporates effect of monetary
policy on exchange rate to answer this
question
Lesson 66
2
Start with IS-LM
Y
i
1
IS
1
LM
1
Y
1
i
F
Y
Lesson 66
3
Expansionary monetary policy shifts LM to
right
Y
i
1
IS
1
LM
1
Y
1
i
F
Y

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