8. In a small open economy, net exports NX depend negatively on domestic in- come Y and negatively on the real exchange rate & eP/P, where e is the nom- inal exchange rate (the foreign-currency price of domestic currency), and Pand P* are the domestic- and foreign-currency prices of domestically and foreign- produced goods, respectively. Assume initially that both P and P* are fixed. There is perfect mobility of capital, so balance-of-payments equilibrium requires that ii, where i and i are the domestic and foreign interest rates. Assume the economy adopts a flexible exchange rate regime. (a) Using the IS-LM-BP model, carefully explain whether monetary policy and/or fiscal policy can succeed in raising the economy's GDP. Now assume instead that the economy adopts a fixed exchange rate regime. (b) For each of the policies below, explain what foreign-exchange market intervention is required to support the fixed exchange rate, and whether the policy would succeed in raising GDP:

8. In a small open economy, net exports NX depend negatively on domestic in- come Y and negatively on the real exchange rate & eP/P, where e is the nom- inal exchange rate (the foreign-currency price of domestic currency), and Pand P* are the domestic- and foreign-currency prices of domestically and foreign- produced goods, respectively. Assume initially that both P and P* are fixed. There is perfect mobility of capital, so balance-of-payments equilibrium requires that ii, where i and i are the domestic and foreign interest rates. Assume the economy adopts a flexible exchange rate regime. (a) Using the IS-LM-BP model, carefully explain whether monetary policy and/or fiscal policy can succeed in raising the economy's GDP. Now assume instead that the economy adopts a fixed exchange rate regime. (b) For each of the policies below, explain what foreign-exchange market intervention is required to support the fixed exchange rate, and whether the policy would succeed in raising GDP:

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 6PA

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