Answer to Question #296211 in Economics for carol

Question

suppose that there is an increase in the foreign interest rate. use the IS and LM curves to show what will happen in the domestic economy when there is perfect capital mobility and pegged exchange rate

Answer 1

This appreciation of the exchange rate induced by higher interest rate leads to reduction in exports and increase in imports. As a result, there is the reduction in net exports which completely offsets the impact of fiscal expansion on national income and output.