Illustrate the effects of the shock using the is-lm-fx model

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Reference no: EM131480099

Question: 1. For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock. For each case, state the effect of the shock on the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Assume the government allows the exchange rate to float and makes no policy response.

a. Foreign output decreases.

b. Investors expect a depreciation of the home currency.

c. The money supply increases.

d. Government spending increases.

2. How would a decrease in the money supply of Paraguay (currency unit is the "guaraní") affect its own output and its exchange rate with Brazil (currency unit is the "real"). Do you think this policy in Paraguay might also affect output across the border in Brazil? Explain.

Reference no: EM131480099

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