Consider a country operating under fixed exchange rates. The IS curve is given by equation (20.1) a.
Question:
Consider a country operating under fixed exchange rates. The IS curve is given by equation (20.1)
a. Explain the term \(\left(i^{*}-\pi^{e}ight)\). Why does the foreign nominal interest rate appear in the relation?
b. Explain why when \(\pi^{e}\) increases, the IS curve shifts left.
c. In the following table, how is the real exchange rate evolving from period 1 to period 5? What is domestic inflation? What is foreign inflation? Draw an IS-LM diagram with the IS curve in period 1 and the IS curve in period 5. 
d. In the following table, how is the real exchange rate evolving from period 1 to period 5 ? What is domestic inflation? What is foreign inflation? Draw an IS-LM diagram with the IS curve in period 1 and the \(I S\) curve in period 5.
e. In the table that follows, how is the real exchange rate evolving from period 1 to period 4? What is domestic inflation? What is foreign inflation? What happened between Period 4 and Period 5? Draw an IS-LM diagram with the IS curve in period 1 and the IS curve in period 5.
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