Assume a small open country under fixed exchanges rate and full capital mobility Prices are fixed i...........

Economics- Phase (I & II) IS-LM

Assume a small open country under fixed exchanges rate and full capital mobility. Prices are fixed in the short run and equilibrium is given initially at point A. An exogenous increase in public spending shifts the IS curve to IS'. Which of the following statements is true?

Point B can only be reached in the absence of capital mobility.

A new equilibrium is reached at point C.

A new equilibrium is reached at point B.

The TR curve will shift down until it passes through point B.

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Explanation:

See the discussion of Figure. In the short run, output increases and so does money demand. The central bank must supply the money demanded at the prevailing interest rate i=i*. Since an autonomous monetary policy is not feasible, the TR curve is irrelevant.