1. Assume country L has accumulated large external debt burden. Assume also that most of that debt...
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1. Assume country L has accumulated large external debt burden. Assume also that most of that debt is denominated in USD. If the US reduces its money supply, increasing its interest rate:
a. Draw the forex market graph showing what happens to the exchange rate of L.
b. How does this change affect L's external wealth?
c. To prevent this change, what monetary policy could L implement? Show the effect of such a policy using the IS-LM.
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