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Questions › DSE › DSE 2009 › Q53
2 marksInternational Economics › Open-economy macroeconomics › The Mundell-Fleming model: IS, LM and BPHardabout 4 min

DSE 2009 Question 53: 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 Pˉ\bar PPˉ results in

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Answer and worked solution

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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 P̄ results in (A) an increase in the equilibrium value of Y and a decrease in the equilibrium value of e (B) a decrease in the equilibrium value of Y and an increase in the equilibrium value of e (C) a decrease in the equilibrium value of Y and a decrease in the equilibrium value of e (D) none of the above

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 P_bar results in

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.