In the open-economy ISLM model,net export is specified as a function of ________ and exchange rate is specified as a function of ________.
A)output;output
B)money supply;interest rate
C)exchange rate;interest rate
D)exchange rate;money demand

Question

Quizplus · Accepted Answer

In the open-economy ISLM model, net export is a function of the exchange rate (since it affects the price competitiveness of exports and imports), while the exchange rate is a function of the interest rate differential between countries (since it affects the attractiveness of investing in different currencies and assets). Money supply and money demand are relevant for the domestic ISLM model, but not directly for the open-economy version. Output is a dependent variable in both models, but not relevant for specifying the exchange rate.

In the Open-Economy ISLM Model,net Export Is Specified as a Function