For each of the following scenarios, assume the economy experiences a temporary

Question

For each of the following scenarios, assume the economy experiences a temporary and unexpected exogenous decrease in investment demand. For each case that follows below, illustrate what happens in the short run using the IS-LM-FX diagram by starting from an arbitrary equilibrium.

To complete your answer, please fill out the table below in the corresponding column for the row Change with an up arrow (^) if the temporary change in a variable is positive, with a down arrow (>) if the temporary change in a variable is negative, with a dash (- ) if there is no temporary change in a variable, and with a question mark (?) if the temporary change in a variable is ambiguous. There are 6 variables that you need to explain what happens to them when there is a decrease in investment demand in the short run using IS-LM-FX

1. Fiscal policy response under a floating exchange rate regime with the objective of returning output to its initial equilibrium value?

Variable: Y i E C I TB(net export)

Change:

Explanation / Answer

Income Y increases, interest i increases, exchange rate falls, consumption increases, investment falls, net exports fall

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