Economics Asked by Ralle Kalle on May 30, 2021
I am looking of the effects of an increased money supply abroad on home’s economy.
Capital is supposed to be immobile, i.e. NFI = 0.
Within an IS-LM-BP-modell (Mundell-Fleming) a vertical line denotes the balance of payments.
Regarding both fixed and flexible exchange rates, which effects on home’s economy should be expected?
In the case of flexible exchange rates I expect a revaluation of home’s currency, which results in a
shift of the BP curve to the left. A decrease in net exports and income would correspond with an inward shift of the IS curve.
The increased money supply abroad would lead to a lower foreign interest rate, stimulating foreign’s economy and increasing income and demand for imports. This would shift home’s IS curve to the right again. How would the central bank in home react?
Which reactions can we expect in the case of fixed exchange rates?
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