Consider an open economy with a floating exchange rate regime. After a terrorist attack in the country, consumer confidence and business confidence have taken a serious hit, negatively impacting consumption and investment in the economy. To prevent the economy from suffering too badly, the central bank wants to intervene in such a way as to keep output at the same level as before the terrorist attacks. Within the IS-MP framework, explain and illustrate graphically the impact of the drop in consumer and business confidence and subsequent central bank intervention on equilibrium output, the real interest rate, net cash outflow, the trade balance and the country’s real exchange rate. Is it possible for you to determine the overall impact on consumption and investment. Explain why or why not.
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Consider an open economy with a floating exchange rate regime. After a terrorist attack in the country, consumer confidence and business confidence have taken a serious hit, negatively impacting consumption and investment in the economy. To prevent the economy from suffering too badly, the central bank wants to intervene in such a way as to keep output at the same level as before the terrorist attacks. Within the IS-MP framework,
explain and illustrate graphically the impact of the drop in consumer and business confidence and subsequent central bank intervention on equilibrium output, the real interest rate, net
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