Illustrate using the is-lm-fx model

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Reference no: EM132503215

Assume we are in a world consisting fo two countries: a small, open economy named "Home" and the "Rest of the World" (ROW).Assume that the government responds to shocks using monetary policy. However, its primary goal is to maintain a FIXED exchange rate rather than to stabilize output.

Illustrate using the IS-LM-FX model and explain why and how the following variables are affected by the shock and the policy response: Y, i, E, C, I, and TB.

1) RoW output increases

2) Investors expect an appreciation of the home currency in the future.

3) The home money supply decreases

4) Government spending at home decreases.

Reference no: EM132503215

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