Assume a small open country with full capital mobility The initial equilibrium in the goods and mon...........

Economics- Phase (I & II) IS-LM

Assume a small open country with full capital mobility. The initial equilibrium in the goods and money market is at point A where IS and LM intersect with i*. World interest rates jump upward to i*´. The rightward shift in the IS curve to IS´ that would follow under (A) _____ is due to the (B)

(A) fixed exchange rates; (B) increase in government deficits due to higher interest rates

(A) fixed exchange rates; (B) lower demand for money due to higher interest rates leading to an increased demand for consumption goods

(A) flexible exchange rates; (B) exchange rate depreciating

(A) flexible exchange rates; (B) exchange rate appreciating

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Explanation:

See Figure. It is the depreciating exchange rate that makes home goods more competitive so that net exports increase and that is what moves the IS curve out.