Flexible exchange rate regime in open macroeconomic model

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The following questions are based on fixed exchange rate and/or flexible exchange rate regime in an open macroeconomic model.

a. suppose the domestic and foreign interest rates are both initially equal to 4%. Now suppose the foreign interest rate rises to 6%. Explain what effect this will have on the exchange rate. Also explain what must occur for the interest parity condition to be restored.

b. assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what effect an increase in government spending will have on the domestic economy. in your graphs, clearly label all curves and equilibria.

Reference no: EM13831866

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