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assume imperfect capital mobility. assume as a flexible exchange rate and assume that the BP schedule...

assume imperfect capital mobility.
assume as a flexible exchange rate and assume that the BP schedule is steeper than LM schedule.

Analyze the effect of an expansion fiscal policy.
Draw the IS LM BP model. Explain details

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Answer #1

Answer) In case of imperfect mobility, the capital doesn't move from one nation to another when the interest rate change. The BP curve is steeper then the LM curve, then the steps occured are:

  1. An increase in the IS schedule raises the rate of interest. Since the Equilibrium is below BP curve.
  2. There exist a level of deficit in the economy.
  3. Deficit leads to a depreciation of domestic currency, that causes the LM curve to shift to the left hand side.
  4. As a result the interest rate rises  

Whenever the BP curve is steeper than the LM curve. Then the IS and LM curve move in the opposite direction to restore disequilibrium in the nation.

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