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Internal balance and external balance

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A country initially has achieved both internal balance and external balance. International financial capital is highly but not perfectly mobile. The country has a fixed exchange rate and defends the fixed rate using official intervention, but does not sterilise through open market operation. As a result of new government policy, foreign investment become bullish in the country. With the aid of an IS-LM-FE diagram, explain the effect of the increase in international financial capital flow results in external imbalance and, how the official intervention by the central bank can adjust it back to external balance

Reference no: EM132955811

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