Consider a floating exchange rate regime. How does higher government purchases affect output and interest rate in equilibrium? Answer and discuss with the help of the diagram given (e.g., show what curves will shift, label curves and axes correctly).Consider a fixed exchange rate regime. How does higher government expenditure affect output and interest rate in equilibrium? Discuss with the help of the diagram (e.g., show what curves will shift, label curves and axes correctly).Are your conclusions in (1) and (2) consistent with Mankiw's conclusion using the IS-LM diagram drawn in exchange rate-Output axes? Discuss. 1. Consider Figure 1 below of "conventional" IS-LM curves with interest rate (r) and output (Y) asaxis. Answer the following question using diagrams and essays with not more than 10sentences. Assume that the economy is a small- open economy with perfect capital mobilitywhere r* is the world interest rate and r is the domestic interest rate.Vr= 6*Y*Figure 1. Open Economy IS-LM Model in a r-Y axisLMISY

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider a floating exchange rate regime. How does higher government purchases affect output and interest rate in equilibrium? Answer and discuss with the help of the diagram given (e.g., show what curves will shift, label curves and axes correctly).
Consider a fixed exchange rate regime. How does higher government expenditure affect output and interest rate in equilibrium? Discuss with the help of the diagram (e.g., show what curves will shift, label curves and axes correctly).
Are your conclusions in (1) and (2) consistent with Mankiw's conclusion using the IS-LM diagram drawn in exchange rate-Output axes? Discuss.

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