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

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 leads to a decrease in interest rates, which decreases the demand for the domestic currency and leads to a depreciation of the currency. This depreciation increases net exports and shifts the IS curve to the right, resulting in a new equilibrium at point F. Therefore, the final equilibrium will be at point B' in the open economy, which is the intersection of the LM' curve and the new IS' curve.

Figure 36-6 In Figure 36-6, an Expansive Monetary Policy in a Closed