The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy was at point A, a triple intersection. Here, the FE curve is flatter than the LM curve. At point B, the economy is experiencing:
A)a decreasing money supply.
B)a surplus in the overall balance of payments.
C)an overall balance of payments that is in equilibrium.
D)a high rate of unemployment.

Question

The figure below shows an IS-LM-FE model for an economy with fixed exchange rates. Initially the economy was at point A, a triple intersection. Here, the FE curve is flatter than the LM curve.  At point B, the economy is experiencing:
A)a decreasing money supply. 
B)a surplus in the overall balance of payments. 
C)an overall balance of payments that is in equilibrium. 
D)a high rate of unemployment.

Quizplus · Accepted Answer

At point B, the LM curve has shifted to the left, indicating a decrease in the money supply. The FE curve has also shifted leftward, indicating a surplus in the overall balance of payments. The intersection of the two curves is at a point where the FE curve is steeper than the LM curve, indicating that the economy is in a state of disequilibrium, or excess demand for foreign currency. Therefore, the correct answer is B, a surplus in the overall balance of payments.

The Figure Below Shows an IS-LM-FE Model for an Economy