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Questions › DSE › DSE 2009 › Q52
2 marksInternational Economics › Open-economy macroeconomics › The Mundell-Fleming model: IS, LM and BPHardabout 4 min

DSE 2009 Question 52: Open-economy macroeconomics

Setup, from Q51 of the paper:

An economy is described by a goods-market equilibrium Y=C(Y)+I(r)+G+NX(Y,e)Y=C(Y)+I(r)+G+NX(Y,e)Y=C(Y)+I(r)+G+NX(Y,e) and a money-market equilibrium M/P=L(Y,r)M/P=L(Y,r)M/P=L(Y,r), with C=Cˉ+σ(Y−T)C=\bar C+\sigma(Y-T)C=Cˉ+σ(Y−T), T=τYT=\tau YT=τY, I=Iˉ−δrI=\bar I-\delta rI=Iˉ−δr, NX=Xˉ−μY−γeNX=\bar X-\mu Y-\gamma eNX=Xˉ−μY−γe, L=Lˉ+αY−βrL=\bar L+\alpha Y-\beta rL=Lˉ+αY−βr, and r=rˉr=\bar rr=rˉ, M=MˉM=\bar MM=Mˉ, P=PˉP=\bar PP=Pˉ fixed. Drawing IS and LM in the (Y,e)(Y,e)(Y,e) plane with YYY horizontal and eee vertical. In this case

(Same model.) An increase in rˉ\bar rrˉ shifts

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Plain-text version

Setup, from Q51 of the paper: An economy is described by a goods-market equilibrium Y=C(Y)+I(r)+G+NX(Y,e) and a money-market equilibrium M/P=L(Y,r), with C=C̄+σ(Y-T), T=τ Y, I=Ī-δ r, NX=X̄-μ Y-γ e, L=L̄+α Y-β r, and r=r̄, M=M̄, P=P̄ fixed. Drawing IS and LM in the (Y,e) plane with Y horizontal and e vertical. In this case (Same model.) An increase in r̄ shifts (A) the IS curve to the left and the LM curve to the right (B) the IS curve to the right and the LM curve to the left (C) both the IS and the LM curves to the left (D) both the IS and the LM curves to the right

Also written as: Setup, from Q51 of the paper: An economy is described by a goods-market equilibrium Y=C(Y)+I(r)+G+NX(Y,e) and a money-market equilibrium M/P=L(Y,r), with C=C_bar+sigma(Y-T), T=tau Y, I=I_bar-delta r, NX=X_bar-mu Y-gamma e, L=L_bar+alpha Y-beta r, and r=r_bar, M=M_bar, P=P_bar fixed. Drawing IS and LM in the (Y,e) plane with Y horizontal and e vertical. In this case (Same model.) An increase in r_bar shifts

Open-economy macroeconomics has come up 55 times in 7 exams since 2006.

What this question tests

This question is on The Mundell-Fleming model: IS, LM and BP, part of Open-economy macroeconomics in International Economics.

The open-economy extension of IS-LM with a balance-of-payments schedule.

TestStop has 12 past-paper questions on this subtopic; the nearest in year are below.

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Question from the DSE 2009 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.