IS-LM OPEN ECONOMY

Question 1

Open IS-LM curve formula

Answer 1

Y = C + I + G + NX

Question 2

In a open economy what happens to Y?

Answer 2

Y is now dependent to NX (net exports)

Question 3

What are net exports dependent upon?

Answer 3

They are dependent upon domestic income(Y), foreign income(Y*) and real exchange rates(R).

Question 4

Symbol for Domestic income

Answer 4

Y

Question 5

Symbol for foreign income

Answer 5

Y*

Question 6

If our domestic income increases what will the economy do?

Answer 6

Increase Imports

Question 7

And the moment imports increase what will happen?

Answer 7

Net exports will fall

Question 8

If Foreign income is going to increase, what will foreigners do?

Answer 8

They will increase their import demand, meaning our exports are going to increase

Question 9

Our net exports increase if R is going to

Answer 9

Increase

Question 10

If R/ Exchange rate increases, it means

Answer 10

our domestic currency has depreciated

Question 11

With Domestic income, net exports have a ____

Answer 11

negative relationship

Question 12

If Y:
Y(increases)
M/ Imports (increases)
NX ____

Answer 12

NX decreases therefore there is a negative relationship

Question 13

If Y:
Y increases
X increases
NX___

Answer 13

increases therefore there is a positive relationship

Question 14

IS curve is draw in ___

Answer 14

(i,Y) space

Question 15

with foreign income and real exchange rates, net exports have a ________

Answer 15

positive relationship

Question 16

For the slope of the IS curve, the formula is___

Answer 16

Y = C + I(i) + G + NX (Y, Y*, R)

Question 17

Any changes in the interest rates will bring____

Answer 17

Changes in (i,Y) movement along the curve NOT the shift in the IS curve

Question 18

Shift in the IS curve in an open economy could be caused by

Answer 18

Foreign interest rates, Foreign income and real exchange rates

Question 19

Real exchange rate increasing means

Answer 19

there is depreciation of domestic currency and Net Exports will decrease

Question 20

Net Exports will increase means ___

Answer 20

IS curve will shift outwards