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Unformatted text preview: r1 a b Depreciation causes
the IS curve to
shift to the right IS2
IS1
O Y1 Y2 An expansionary fiscal policy:
BP curve steeper than LM curve
LM Y ISLMBP analysis: floating exchange rates
r r3
r2
r1 BP1 a b c BP2
LM
Full equilibrium is
achieved at point c IS3
IS2
IS1
O Y1 Y2 Y3 An expansionary fiscal policy:
BP curve steeper than LM curve
LM Y ISLMBP analysis: floating exchange rates Effect of an expansionary
Effect
monetary policy
under floating exchange rates ISLMBP analysis: floating exchange rates
r LM1
LM2
BP1 r1 a r2 b IS1
O Y1 Y2 An expansionary monetary policy Y ISLMBP analysis: floating exchange rates
r LM1
LM2
BP1 r1 a r2 b The balance of payments
deficit causes the BP line
to shift downward IS1
O Y1 Y2 An expansionary monetary policy Y ISLMBP analysis: floating exchange rates
r LM1
LM2
BP1 r1 a r2 b The depreciation
causes the IS curve
to shift to the right IS1
O Y1 Y2 An expansionary monetary policy Y ISLMBP analysis: floating exchange rates
r LM1
LM2
BP1 r1
r3 a r2 BP2 c
b Full equilibrium is
restored at point c IS2
IS1
O Y1 Y2 Y3 An expansionary monetary policy Y...
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 Spring '09
 Deficit

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