Suppose the foreign country is experiencing a recession that reduces foreign output, Y*. To stimulate the economy, foreign central bank pursuits an expansionary monetary policy by reducing foreign interest rate, i*. In an IS-LM-UIP diagram, show the effect of the decrease in foreign output, Y*, and the decrease in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank matches the decrease in the foreign interest rate with an equal decrease in the domestic interest rate.
Suppose the foreign country is experiencing a recession that reduces foreign output, Y*. To stimulate the economy, foreign central bank pursuits an expansionary monetary policy by reducing foreign interest rate, i*. In an IS-LM-UIP diagram, show the effect of the decrease in foreign output, Y*, and the decrease in the foreign interest rate, i*, on domestic output (Y) and the exchange rate (E), when the domestic central bank matches the decrease in the foreign interest rate with an equal decrease in the domestic interest rate.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose the foreign country is experiencing a recession that reduces foreign output, Y*. To stimulate the economy, foreign central bank pursuits an expansionary
Transcribed Image Text:(a)
(b)
Interest parity
relation given
(i', E")
LM
B
IS
E
Output, Y
Exchange rate, E
Domestic interest rate, i
Domestic interest rate, i
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