Homework
At the new lower interest rate and at full
employment, on the new LM curve (LM2 ), what
is the new level of the money supply?
According to the forex market equilibrium,
what is the new level of the spot exchange
rate? How large is the depreciation of the
home currency?
Plot the new 1S2 and LM2 curves for case 2
on a chart. Label the axes and the equilibrium
values.
Return to part (e). Now assume that the central
bank refuses to change the interest rate from
10%. In this case, what is the new level of
output? What is the money supply? And if
the government decides instead to use fiscal
policy to stabilize output, then according to the
new IS curve, by how much must government
spending be increased to achieve this goal? Call
this case 3
