Author Question: Explain what effect each of the following events will have on the IS curve in a flexible exchange ... (Read 46 times)

Starlight · **on:** Jun 30, 2018

Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime: (1 ) an increase in foreign output; (2 ) a reduction in the foreign interest rate; and (3 ) an increase in the domestic interest rate.

What will be an ideal response?

Question 2

Assume that constant returns to scale exists and that N and K both decrease by 3. Given this information, we know that

A) output (Y) will decrease 6.
B) Y will decrease by 3.
C) Y will decrease by less than 3.
D) the capital-labor ratio (K/N) will decrease.

kristenb95 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

An increase in Y causes X to rise, Z to rise, and the IS curve to shift to the right. A reduction in i will cause an appreciation of the domestic currency, a reduction in NX, and a leftward shift in the IS curve. A change in i will only cause a movement along the IS curve.

Answer to Question 2

B