Why might a country with a fixed exchange rate contemplate
1.Compare and contrast the effect of an increase in Foreign interest rates on Home’s economy under fixed and floating exchange rate regimes. Use the IS-LM-FX model for each case (flexible and fixed exchange rates)
2. Why might a country with a fixed exchange rate contemplate capital controls?
3. Suppose that you are a government official in charge of your country’s fiscal policy. The country maintains a flexible exchange rate system. You are asked by your country’s citizens to use fiscal policy alone to expand the country’s output and to reduce its trade deficit simultaneously. Use the IS-LM diagram to answer the followings:
Is it possible for you to obtain these two goals using only fiscal policy?
Suppose instead that you were in charge of the country’s money supply. Is it possible for you to obtain these goals using monetary policy?
Now suppose that the country has a fixed exchange rate system. Is it possible to use either monetary and fiscal policy to lower the trade deficit and expand national output simultaneously?
