Answer to Question #156571 in Macroeconomics for Suga

Question

A country adopts a flexible exchange rate system with imperfect capital mobility and capital flows are sensitive to changes in interest rates. Following the Covid-19 pandemic, the balance of payments was in a deficit position. Thus, the country intends to stimulate economic growth by reducing the required reserves ratio. Using IS-LM-BP analysis, show and explain the effectiveness of this policy in influencing the aggregate output level. 

Answer 1

Answer :

1)Flexible exchange rate determine by demand and supply.

2) In the same way IS-LM-BP or Mundell model which represent balance in goods and financial market

According to the question :

1)Imperfect capital mobility this means that fiscal expansion causes a capital inflow as well as trader balance deteriorate.

2) IS curve shift rightward means increase in consumption, investment, public spending and net export

3) That's why decrease in output.

4) BoP in deficit outflow >inflow

5) Sale decrease investments decrease... No new production... No output