Suppose the economy is at potential output and the BP curve is shifted to the left, for
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Question:
Suppose the economy is at potential output and the BP curve is shifted to the left, for example, by migrants into the country sending money earned in the country back home to their families at a higher rate. Suppose policy makers wish to maintain employment at potential output and avoid inflation but are willing to tolerate changes in the interest rate. What policy prescription would you recommend? Assume: (i) a fixed exchange rate and (ii) a flexible exchange rate. Assume a BP curve is steeper than the LM curve in both cases.
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