Question:
A South America country with fixed exchange rate system has close economic ties with the USA symbolized by extensive trade and unrestricted flow of capital between the two countries. The economy of this country is in recession and the president of the country tries to get the central bank to intervene and help the economy out of the recession using monetary policy. In a meeting with governor of the central bank, the country's president cites Federal Reserve Board's expansionary monetary policy in the USA during the 2001-2003 period to persuade the governor, but the governor takes the position that the central bank should not intervene.
Do you agree or disagree with the position taken by the governor? Justify and explain your answer using IS-LM curves. Describe precisely each step in the process that you present to explain your answer and label the steps as a, b, c, d, etc, to clearly show the sequence of events and understanding of it for practice problem.