If the central bank holds the real interest rate constant, Financial Management

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If the central bank holds the real interest rate constant

Suppose again that investment rises in Boversia. In this case, assume that higher confidence in the economy also causes a decrease in net capital outflows. Use graphs to answer the following questions:

a. If the central bank holds the real interest rate constant, what happens to output and the real exchange rate?

b. If the central bank wants to keep output constant, should it raise or lower the interest rate?

c. If the central bank wants to keep the exchange rate constant, should it raise or lower the interest rate?

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Financial Management: If the central bank holds the real interest rate constant

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Financial Management: If the central bank holds the real interest rate constant

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