GATE 2025 Question 53: Open-economy macroeconomics

Consider the two scenarios for a small open economy based on the Mundell-Fleming IS-LM model with floating exchange rate and perfect capital mobility

Scenario I: $Y = C(Y-T) + I(r^*) + G + NX(e,Y)$, $\dfrac{M}{\bar P} = L(r^*,Y)$

Scenario II: $Y = C(Y-T) + I(r^*) + G + NX(e)$, $\dfrac{M}{\bar P} = L(r^*, Y-T)$

where $Y$ is aggregate income, $C$ is aggregate consumption, $I$ is investment, $r^*$ is world interest rate, $G$ is government expenditure, $T$ is taxes, $NX$ is net exports, $e$ is exchange rate, $M$ is money supply, and $\bar P$ is general price level.

$I$ has a negative relationship with $r^*$, $NX$ depends negatively on both $e$ and $Y$, and $\bar P$ is fixed.

Given the above information, which of the following statements is/are CORRECT?