3. Let the economy be under a fixed exchange rate regime. Suppose the foreign interest rate increases. a. Show algebraically how the equilibrium output level will change. b. Show algebraically how the balance of payments will change after the change in the world interest rate. c. Show the transmission mechanism of the change in the foreign interest rate. d. Show graphically the effects of the change in the foreign interest rate to the equilibrium of the economy.

Exploring Economics
8th Edition
ISBN:9781544336329
Author:Robert L. Sexton
Publisher:Robert L. Sexton
Chapter29: International Finance
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3. Let the economy be under a fixed exchange rate regime. Suppose the foreign interest rate
increases.
a. Show algebraically how the equilibrium output level will change.
b. Show algebraically how the balance of payments will change after the change in
the world interest rate.
c. Show the transmission mechanism of the change in the foreign interest rate.
Show graphically the effects of the change in the foreign interest rate to the
equilibrium of the economy.
d.
Transcribed Image Text:3. Let the economy be under a fixed exchange rate regime. Suppose the foreign interest rate increases. a. Show algebraically how the equilibrium output level will change. b. Show algebraically how the balance of payments will change after the change in the world interest rate. c. Show the transmission mechanism of the change in the foreign interest rate. Show graphically the effects of the change in the foreign interest rate to the equilibrium of the economy. d.
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