Flexible exchange rate and that the domestic interest rate

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a. In 1917, an explosion in the harbour killed 4 percent of the population of Halifax and injured around 20 percent of the population, including leaving 2 percent of the population with serious eye damage or even blindness from the flying glass. Assuming a closed economy, use an IS-LM-FE diagram and all other relevant diagrams to show what would happen if this decreased the working age population (ignore any possible impact on future wealth or capital). Show and discuss what happens to output, the real interest rate, the price level and real wages.

b. Assuming a flexible exchange rate and that the domestic interest rate does not deviate from the foreign interest rate, use an IS-LM-FE diagram and all other relevant diagrams to show what would happen if the government increases spending (ignore any possible impact on future wealth). Show and discuss what happens to output, the price level, real wages, net exports, the nominal exchange rate and the real exchange rate.

Reference no: EM131391814

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