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Consider an open economy with flexible exchange rates let

Monetary policy in a small open economy

Consider an open economy with flexible exchange rates. Let IS stand for the product market equilibrium condition, LM for the financial market equilibrium, and IP for the interest parity condition.

a. Explain the intuition behind the 3 curves in the IS-LM-IP diagram.

b. In an IS-LM-IP diagram, show the short run effect of monetary policy expansion on domestic output, Y, and the exchange rate, E.

c. Which components of aggregate demand change? Explain in words.

d. What would be the medium run effect of this policy on output?

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Business Management: Consider an open economy with flexible exchange rates let

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