Question 2 Flexible exchange rates and the responses to changes in foreign macroeconomic policy. Suppose the domestic economy is a small open economy and the foreign economy is an important trade partner. The foreign country follows a contractionary monetary policy and increases the foreign interest rate. Use the open economy IS-LM-UIP model to show the effect of the increase in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the domestic policy interest rate unchanged. Analytically explain and graphically illustrate the impact of the foreign policy on domestic output, trade balance and exchange rate.

Question 2 Flexible exchange rates and the responses to changes in foreign macroeconomic policy. Suppose the domestic economy is a small open economy and the foreign economy is an important trade partner. The foreign country follows a contractionary monetary policy and increases the foreign interest rate. Use the open economy IS-LM-UIP model to show the effect of the increase in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the domestic policy interest rate unchanged. Analytically explain and graphically illustrate the impact of the foreign policy on domestic output, trade balance and exchange rate.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter34: International Finance

Section: Chapter Questions

Problem 10QP

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