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Please complete questions involving drawing models by hand. For each question involving the IS-LM-BP model explain the end result of the given policy change on the exchange rate, output, and the interest rate. After drawing the movement of the curves explain in words what is happening in the economy during each given movement, referencing the primary equations in the Model ((X – M) + k(r – r*) = 0 || S(Y) + M(Y) = G + X + I(r) || Md = Ms = Mt(Y) + Msp(r)). For fixed exchange rate questions work through what would happen if policymakers don’t sterilize, then briefly discuss what would happen if they do. No need to discuss long-run criticisms of the model in the “Using Models” section unless explicitly asked.
3: Suppose Canada is a country with a floating exchange rates and High Capital Mobility. They are worried about the inflationary/wealth effects of an overly large depreciation (so they would like to avoid it), but they need to stimulate their economy due to a recession. Use the IS-LM-BP model to explain whether they should engage in a Fiscal or Monetary expansion. Given the prior answer, evaluate this choice incorporating the principle of effective market classification.
Explanation to the diagram:-
- Government expenditure causes the shifts in Is curve that is from IS to IS'.
-The improvement in capital account creates in excess supply in the exchange market.
-The depreciation causes the deterioration in the balance of current account.
-BP curve will increase in correspondence to increase in Y.
- The economy is always in an intersection between LM curve and BP curve.
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