2. Consider the open economy IS-LM model. The equation of the IS curve is Y...
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2. Consider the open economy IS-LM model. The equation of the IS curve is Y = C(Y,T) + I(Y, i) +G+NX(Y,Y*, E). Assume P P*, this implies = E. The uncovered interest parity (UIP) condition is e E= 1+i- j* The equation of the LM curve is M FYL(i). I have shown initial equilibrium of this economy in five inter- connected diagrams on the next page. The initial equilibrium point in all diagrams is ei. In the initial equilibrium, 2i = 11. = (a) Copy the five inter-connected diagrams to your answer book. (5 points) (b) Suppose that the foreign interest rate decreases from it to it. In each diagram, show the effects of the decrease in the foreign interest rate. In all diagrams, label the new equilibrium point (2. (15 points) [Hint: In the new equilibrium, i
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