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)

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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)

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Step 2: Explain the effects of shape of the BP Curve

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Step 3: Explain the response of the BP Curve to Currency Depreciation or Appreciation

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Step 4: Explain the response of the IS and LM Curves to Currency Depreciation or Appreciation

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Step 5: Explain the Response to Expansionary Fiscal Policy with Relative Capital Mobility

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Step 6: Explain the Response to Expansionary Fiscal Policy with Relative Capital Immobility

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