Question
Suppose there are only two countries in the world, Home and Foreign.The Foreign country experiences a decline in their Real GDP (Foreign output decreases), but
Suppose there are only two countries in the world, Home and Foreign.The Foreign country experiences a decline in their Real GDP (Foreign output decreases), but the foreign central bank uses its money supply to keep foreign interest rates unchanged. Use the IS-LM-FX model to illustrate (Draw the graphs) the effects of this shock on the home country. Assume that our home country fixes its exchange rate to the foreign country. Also, state the effect of the shock (increase, decrease, no change, or ambiguous) on the following variables:Y, i, E, C, I, TBin the home country.If it is ambiguous explain why it would be.
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