Question
Suppose that the foreign country (our major trading partner) decides to temporarily reduce their money supply in order to keep their output the same after
Suppose that the foreign country (our major trading partner) decides to temporarily reduce their money supply in order to keep their output the same after a positive demand shock occurs in their country. Use the IS-LM-FX model to illustrate (Draw the graphs) the effects of this policy on us, from the home country perspective.Assume that our country has a floating exchange rate regime with the foreign country. Finally, state the effect of the shock (increase, decrease, no change, or ambiguous) on the following variables:Y, i, E, C, I, TB.If it is ambiguous explain why it would be.
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