19. Consider the fact that the domestic price index (like the CPI) is a function of...

 

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19. Consider the fact that the domestic price index (like the CPI) is a function of both the price of domestic goods and of the price of imports in domestic currency terms, P*/e. Then, under this modified version of the Mundell- Fleming model under floating exchange rates, A) the LM* curve becomes horizontal instead of vertical in the Y-e plane B) the IS* curve becomes vertical in the Y-e plane because it is no longer a function of the exchange rate. C) Net exports are no longer a function of the real exchange rate D) the LM* curve becomes a function of the exchange rate and is upward sloping. 19. Consider the fact that the domestic price index (like the CPI) is a function of both the price of domestic goods and of the price of imports in domestic currency terms, P*/e. Then, under this modified version of the Mundell- Fleming model under floating exchange rates, A) the LM* curve becomes horizontal instead of vertical in the Y-e plane B) the IS* curve becomes vertical in the Y-e plane because it is no longer a function of the exchange rate. C) Net exports are no longer a function of the real exchange rate D) the LM* curve becomes a function of the exchange rate and is upward sloping.

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The detailed answer for the above question is provided below The correct answer is D the LM curve be... View the full answer