For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock.
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For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each

case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, TB. Assume the government allows the exchange rate to float and makes no policy response.

a)    Import demand increases,

b)    Investors expect a more depreciated currency.

Top Answer

a) Increase in import demand shifts the IS curve to the left which leads to fall in... View the full answer

IS LM 2.PNG

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