IS-LM-FX Model with floating exchange rates
Suppose in an economy, there is an exogenous fall in export demand for home goods. Answer the following questions using the IS-LM-FX model.
- Which schedule shifts in the IS-LM model?
- Why? Explain.
- What happens to the equilibrium output after the change?
- What happens to the equilibrium interest rate after the change?
- What happens to the exchange rate after the change?
- Why? Explain.
- What happens to the consumer spending after the change?
- Why? Explain.
- What happens to the investment spending after the change?
- Why? Explain.
- What happens to the trade balance after the change?
- Why? Explain.