Assume the exchange rate is allowed to fluctuate freely. Using ...

[cmoore54]

Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect monetary expansion will have on the domestic economy. In your graphs, clearly label all curves and equilibria.
 
  What will be an ideal response?

Question 2

In the absence of technological progress, we know that the level of output per worker in the steady state will
 
  A) increase over time.
  B) remain constant.
  C) decrease as a result of decreasing returns to scale.
  D) increase or decrease, depending on the rate of saving.
  E) increase or decrease, depending on the rate of depreciation.

[otokexnaru]

Answer to Question 1

An increase in M will cause the LM curve to shift down and the domestic interest rate to fall. As i falls, the return on domestic bonds is less than foreign bonds. This causes an depreciation and an increase in NX. So, the demand for goods rises via the increase in I and NX. We will observe a lower domestic interest rate, a reduction in E, an increase in I, an increase in NX, and an increase in Y.

Answer to Question 2

B