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Suppose, in the New Keynesian open economy model, that there is a negative shock in future total factor productivity and there are no capital controls.
Suppose, in the New Keynesian open economy model, that there is a negative shock in future total factor productivity and there are no capital controls.
a. Under a flexible exchange rate, what are the equilibrium effects?
b. Now suppose that there is a fixed exchange rate. Repeat part (a).
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