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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.
- Winter '08