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Foreign country engages in fiscal expansion

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Reference no: EM132476271

In the open-economy, suppose the domestic economy has a fixed exchange rate and the foreign country engages in fiscal expansion.

  1. Use the IS-LM and interest-parity graphs to show the effects of foreign fiscal expansion on domestic output, interest rate and exchange rate. Assume that the change in i* is smaller than the change in i caused by the initial shift of domestic IS curve. Briefly explain the results
  2. How will the components of GDP (C, I, G, and NX) change and why?

Reference no: EM132476271

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