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Lec22-_Ch20-II_-ECON2123-LI-fa13-stu

Lec22-_Ch20-II_-ECON2123-LI-fa13-stu - Ch 2 0 An Open...

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Ch 20 An Open Economy IS-LM Model (II) 1. Equilibrium in the Goods Market 2. Equilibrium in Financial Markets 3. Putting Goods and Financial Markets Together 4. The Effects of Policy in Open Economy 1) Under Flexible Exchange Rate Regime 2) Under Fixed Exchange Rate Regime 1
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REFRESH 1. Which of the following represents the domestic demand for goods? A) C + I + G B) C + I + G + X C) C + I + G IM/ε D) C + I + G + X - IM/ε E) C + I + G + X + εIM 2. Which of the following occurs when the goods market is in equilibrium? 2
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IN-CLASS 3. Assume a country is open. Given this information, which of the following must occur? for goods demand for goods demand for goods 3
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IN-CLASS 4. Suppose the rest of the world experiences a recession that causes a reduction in foreign income (Y*). From the domestic economy's perspective, this reduction in foreign income will cause which of the following as the domestic economy adjusts to the drop in Y*? 4
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´ Goods-market equilibrium implies that output depends, among other factors, on the interest rate and the exchange rate. * ( ) ( , ) ( , , ) Y C Y T I Y i G N X Y Y E ± ² ² ² 3 GOODS AND FINANCIAL MARKETS TOGETHER (20-3) ´ The interest rate is determined by the equality of money supply and money demand: ( ) M YL i P * 1 1 e i E E i ² ² ´ The interest-parity condition implies a positive relation between the domestic interest rate and the exchange rate: 5
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