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timer Asked: Jul 2nd, 2018

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  1. Using the Mundell-Fleming model (ISLM with IPR), discuss the impact of a negative aggregate demand shock (e.g., negative shock to investor or consumer confidence) on equilibrium values of output, the interest rate, the exchange rate, next exports, and investment. Clearly explain why each of these variables changes: do not just say “the graph shows”; provide the economic intuition behind the observed change in each variable.
  2. Now consider that the country is under a fixed exchange rate regime. How would your analysis in part A change under this scenario? Specifically, what would be the impact on output and how would this be different from the results obtained in part 1? Use appropriate diagrams to illustrate your answers.

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