The figure given below depicts the IS-LM-FE model with floating exchange rates. The shift of the IS curve from IS₁ to IS₂ was caused by: A)a contractionary monetary policy. B)official intervention in the foreign exchange market. C)an improvement in current account position. D)a worsening of international price competitiveness.

Question

Quizplus · Accepted Answer

The shift of IS curve from IS₁ to IS₂ indicates a decrease in output (Y) due to a decrease in aggregate demand. A worsening of international price competitiveness, such as an increase in foreign prices, will decrease exports and increase imports, thus reducing net exports and aggregate demand, which causes the shift of the IS curve to the left.

The Figure Given Below Depicts the IS-LM-FE Model with Floating