Figure 36-6

-In Figure 36-6, an expansive monetary policy in a closed economy results in an equilibrium at point E.In our open economy, allowing for the induced change in the currency exchange rate, the final equilibrium will be at a point like

Question

Figure 36-6
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-In Figure 36-6, an expansive monetary policy in a closed economy results in an equilibrium at point E.In our open economy, allowing for the induced change in the currency exchange rate, the final equilibrium will be at a point like

Quizplus · Accepted Answer

An expansive monetary policy in a closed economy leads to a lower interest rate, causing the currency to depreciate. In an open economy, this depreciation of the currency leads to an increase in net exports, which shifts the AD curve to the right. The new equilibrium will be at a point like F, with a higher output level and a higher price level than the original equilibrium at point E.

Figure 36-6 ​

Figure 36-6