Suppose that the economy has a flexible exchange rate. In an IS–LM–IP diagram, show the short-run effect of the fall in business

a. Suppose that the economy has a flexible exchange rate. In an IS–LM–IP diagram, show the short-run effect of the fall in business confidence on output, the interest rate and the exchange rate. How does the change in the exchange rate, by itself, tend to affect output? Does the change in the exchange rate dampen (make smaller) or amplify (make larger) the effect of the fall in business confidence on output? (4 marks)


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