Question

1?How is the LM curve altered by introducing international trade? How is it altered under fixed...

1?How is the LM curve altered by introducing international trade? How is it altered under fixed exchange rates? How is it altered under flexible exchange rates? What is the effect on the LM curve of an increase in foreign exchange reserves?

2?Define the Marshall-Lerner condition. What are the likely effects of devaluation on a small country that purchases imports in a large world market and sells its exports in such a market?

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Answer #1

Defination : The LM CURVE gives the combination of income and intrest rate for which the demand for money euals the money supply and hence for which domestic economy is in asset for stock equibillirium. The name LM means LIQUIDITY-MONEY.

  • A decrease in e also called revolution under fixed exchange rates allowws domestic residents to by the same amount of foreing Goods using less domestic currency.
  • If e increase domestic residents will need to give more currency to recieve one unit if foreing currency.
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