Assume that for an economy the Marshall-Lerner condition does not hold, and further, elasticities are such that the depreciation of the domestic currency actually worsens the current account balance. Also assume that the economy is operating under flexible exchange rates. Under these conditions discuss the effects of these on: 1. The shape (slope, direction etc.) of the BP curve. 2. Response of the BP curve to a currency depreciation, or appreciation. 3. Response of the IS and LM curves to a currency depreciation, or appreciation. 4. Response of the economy to an expansionary fiscal policy action under relative capital mobility. (BP curve flatter than LM) 5. Response of the economy to an expansionary fiscal policy action under relative capital immobility. (BP curve steeper than LM)
Assume that for an economy the Marshall-Lerner condition does not hold, and further, elasticities are such that the depreciation of the domestic currency actually worsens the current account balance. Also assume that the economy is operating under flexible exchange rates. Under these conditions discuss the effects of these on: 1. The shape (slope, direction etc.) of the BP curve. 2. Response of the BP curve to a currency depreciation, or appreciation. 3. Response of the IS and LM curves to a currency depreciation, or appreciation. 4. Response of the economy to an expansionary fiscal policy action under relative capital mobility. (BP curve flatter than LM) 5. Response of the economy to an expansionary fiscal policy action under relative capital immobility. (BP curve steeper than LM)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Assume that for an economy the Marshall-Lerner condition does not hold, and further,
elasticities are such that the depreciation of the domestic currency actually worsens the current
account balance. Also assume that the economy is operating under flexible exchange rates.
Under these conditions discuss the effects of these on:
1. The shape (slope, direction etc.) of the BP curve.
2. Response of the BP curve to a currency depreciation, or appreciation.
3. Response of the IS and LM curves to a currency depreciation, or appreciation.
4. Response of the economy to an expansionary fiscal policy action under relative capital
mobility. (BP curve flatter than LM)
5. Response of the economy to an expansionary fiscal policy action under relative capital
immobility. (BP curve steeper than LM)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ffc61a36b-de13-4f4f-b18a-7fb4960cbf24%2F835b4f16-1c28-483b-b9c4-07f2f8f0df86%2Fd3t1lo_processed.png&w=3840&q=75)
Transcribed Image Text:Assume that for an economy the Marshall-Lerner condition does not hold, and further,
elasticities are such that the depreciation of the domestic currency actually worsens the current
account balance. Also assume that the economy is operating under flexible exchange rates.
Under these conditions discuss the effects of these on:
1. The shape (slope, direction etc.) of the BP curve.
2. Response of the BP curve to a currency depreciation, or appreciation.
3. Response of the IS and LM curves to a currency depreciation, or appreciation.
4. Response of the economy to an expansionary fiscal policy action under relative capital
mobility. (BP curve flatter than LM)
5. Response of the economy to an expansionary fiscal policy action under relative capital
immobility. (BP curve steeper than LM)
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step 1: Define exchange rate
VIEWStep 2: Explain the effects of shape of the BP Curve
VIEWStep 3: Explain the response of the BP Curve to Currency Depreciation or Appreciation
VIEWStep 4: Explain the response of the IS and LM Curves to Currency Depreciation or Appreciation
VIEWStep 5: Explain the Response to Expansionary Fiscal Policy with Relative Capital Mobility
VIEWStep 6: Explain the Response to Expansionary Fiscal Policy with Relative Capital Immobility
VIEWSolution
VIEWStep by step
Solved in 7 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education