10. Suppose Zambia is a small open economy (It cannot affect the world interest rate) with...

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10. Suppose Zambia is a small open economy (It cannot affect the world interest rate) with perfect capital mobility and a floating exchange rate. With the help of clearly labelled diagrams, show and explain the effect on aggregate income, exchange rate and trade balance (net exports) of the following policies: a) An expansionary monetary policy where government through the central bank increases the money supply b) An expansionary fiscal policy where government spending increases c) A trade policy where government imposes an import quota d) How will the above policies affect the macroeconomic variables if the exchange rate was fixed rather than floating? 10. Suppose Zambia is a small open economy (It cannot affect the world interest rate) with perfect capital mobility and a floating exchange rate. With the help of clearly labelled diagrams, show and explain the effect on aggregate income, exchange rate and trade balance (net exports) of the following policies: a) An expansionary monetary policy where government through the central bank increases the money supply b) An expansionary fiscal policy where government spending increases c) A trade policy where government imposes an import quota d) How will the above policies affect the macroeconomic variables if the exchange rate was fixed rather than floating?

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To analyze the effect of various policies on a small open economy with a floating exchange rate we will use the ISLMBP model This model combines the IS investmentsavings curve the LM liquiditymoney cu... View the full answer