Answer to Question #96432 in Macroeconomics for vainikolo sisifa

Question

Question 4
External shocks affect the internal economy. Given the case below and using the IS-LM-BP model to graphically analysis and explain how this comes about.
Case: The case of recovery after the worldwide recession in the early 1990’s led to a rise in foreign income: Floating ER, Limited Capital Mobility. (4 marks)

Answer 1

An external shock is an unexpected change in an economic variable which takes place outside the economy.

The foreign income may increase due to overall recession and decrease of production inside the country. As a result LM curve will shift to the right, the output will increase, and the interest rate will decrease.