Question:
With reference to IS LM BP analysis for a small economy, answer the following questions and provide the required explanation:
(a) Assuming perfect capital mobility, examine the effect that an increase in the level of Government expenditure has for the domestic economy. Consider both the case of a fixed and flexible exchange rate.
(b) Assuming zero capital mobility, examine the effect that an increase in the money supply has for the domestic economy. Consider both the case of a fixed and flexible exchange rate.
(c) A macroeconomic policy that benefits one country can harm another. Consider this statement in the context of expansionary monetary policy.