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- a An increase in Y shifts the IS curve to the right The incipient rise in the home interest rate creates a monetary expansion as the home

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Econ301wi11 Dong Won Lee - 1 - Chapter 20. Questions and Problems Answers 4. Flexible exchange rates and foreign macroeconomic policy a. The IS curve shifts right, because net exports increase. Domestic output increases. b. The IS curve shifts right, because the increase in i * creates a depreciation of the domestic currency ( ) E under UIP , and therefore an increase in net exports. Domestic output increases. The interest parity relation line also shifts up . c. A foreign fiscal expansion is likely to increase Y * and to increase i * . A foreign monetary expansion is likely to increase Y * and to reduce i * . d. A foreign fiscal expansion is likely to increase domestic output. A foreign monetary expansion has an ambiguous effect on domestic output. The increase in Y * tends to increase home output, but the fall in i * tends to reduce home output. 5.
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Unformatted text preview: a. An increase in Y * shifts the IS curve to the right. The incipient rise in the home interest rate creates a monetary expansion as the home central bank purchases foreign exchange to prevent the domestic currency from appreciating. So, the LM curve shifts down. Domestic output increases. b. The interest parity line shifts up, and the LM curve shifts up as the central bank sells foreign exchange to prevent the domestic currency from depreciating. Domestic output falls, which leads to an increase in net exports. c. A fiscal expansion in the leader country, which increases Y * and i * , reduces domestic output, if the effect of Y * on domestic output is small. A monetary expansion in the leader country, which increases Y * and reduces i * , increases domestic output....
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This document was uploaded on 01/25/2012.

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