Floating rates and fixed exchange rates

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Reference no: EM131196647

Consider an small open economy. Suppose that money demand depends on disposable income, so that the equation for the money market becomes

M/P = L(r, Y − T).

Analyze the impact of a tax cut in a small open economy on the exchange rate and income under both:

(a) floating rates

(b) fixed exchange rates.

Reference no: EM131196647

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