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Assume the government allows the exchange rate to float and

1. For each of the following situations, use the IS-LM- FX model to illustrate the effects of the shock. For each case, state the effect of the shock on the equilibrium values of the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, and TB. Assume the government allows the exchange rate to float and makes no policy response.

a. Foreign output increases.

b. Home government spending decreases.

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Business Management: Assume the government allows the exchange rate to float and

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