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Impacts of a monetary policy contraction on output

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Reference no: EM131901443

Consider a small open economy with a flexible exchange regime, and use IS-LM, AS-AD and interest parity (IP) graphs under the Mundell-Fleming model:

a) Show the impacts of a monetary policy contraction on output, the interest rate, the nominal exchange rate, real exchange rate and price level target in the short run.

b) Show the impacts of a monetary policy contraction on output, the interest rate, the nominal exchange rate, real exchange rate and price level target in the medium run.

c) Discuss the overshooting of the nominal exchange rate by using a well-labelled graph.

d)"A monetary policy contraction leads in the short run to appreciation of the nominal exchange rate beyond the medium-run effect." Discuss using a well-labelled graph.

Reference no: EM131901443

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