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4.Consider a small open economy that maintains a floating exchange rate and is characterized by perfect capital mobility.Suppose that the interest rate prevailing in the
4.Consider a small open economy that maintains a floating exchange rate and is characterized by perfect capital mobility.Suppose that the interest rate prevailing in the international capital market falls, and that this decrease is expected to be temporary. Explain what affects you would expect this shock to have on the following domestic macroeconomic variables
a)The nominal exchange rate.
b)Real GDP.
c)The domestic interest rate.
The domestic money supply
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