Problem Set _6 ANSWERS

Problem Set _6 ANSWERS - B Answer BOTH of the following...

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Problem Set #6 4/10 B. Answer BOTH of the following questions based on the standard models of analysis developed in class. 1. Open Economy IS-LM Model with the Foreign Exchange Market (35 points). Argentina and Brazil are major trading partners that are initially in general equilibrium with flexible exchange rates. a. Based only on this information, use an open economy IS – LM model diagram for each country, as well as a diagram of the foreign exchange market for the Argentine peso, to clearly and accurately show each economy’s initial equilibrium position and equilibrium in the foreign exchange market. These diagrams should be shown in BLACK. Foreign Exchange Market IS 1 Argentina Brazil r r 1 r 0 r r 0 r 1 Y 1 Y 0 Y Y 1 Y 0 Y IS 0 LM 0 LM 1 LM 0 IS 0 S 0 D 0 Q Peso P Peso P 2 P 0 S 1 D 1 S 2
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