Question
Suppose the home economy was initially at the long run equilibrium. The consumption in the country depends on the disposable income, Y-T, C = C(Y-T),
Suppose the home economy was initially at the long run equilibrium. The consumption in the country depends on the disposable income, Y-T, C = C(Y-T), and the investment depends on the interest rate of the country,i, I = I(i). Assume the home country follows a fixed exchange rate system. Now, the central bank of the home country revaluates its currency, decreases of the current and expected par values of exchange rate, E(H/F), and Ee(H/F). Use the IS-LM-FX model to explain (in words) the short run effects of the revaluation. Be sure to explain
(i) movements (shifts) of all curves starting from the initial long run equilibrium including
(ii) the reasons for the shifts, and
(iii) the movements of equilibrium levels (relative to the initial levels) for the home country's interest rate, income (output) level, and the exchange rate (amount of home currency per one unit of foreign currency) to get full marks.
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