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IS-LM-BP (Perfect Mobility); Fixed Exchange Rates

Contractionary Monetary Policy The policy shifts the LM curve to the left (LM1). Decrease income and increase interest (r1 less than r0 and y1 less than y0). Higher interest rates attract foreign investment, causing a balance of payments surplus. This would generate an appreciation of the local currency, the monetary authority then issues currency to counterbalance this effect, due to the fixed exchange rate regime.	Expansionary Monetary Policy The policy shifts the LM curve to the right (LM1). Increases income and decreases interest (r1 less than r0 and y1 less than y0). Lower interest rates make investing abroad more attractive, causing a deficit in the balance of payments. This would generate a devaluation of the local currency, the monetary authority then withdraws currency to counterbalance this effect, due to the fixed exchange rate regime.	Política Fiscal Expansionista The policy shifts the IS curve to the right, increasing income and the interest rate (y1>y0 and r1>r0). The higher interest rate attracts foreign investment. To avoid the fall in the exchange rate, the government buys these foreign currencies, increasing the supply of local money (shifting the LM to the right until it matches the equilibrium of the BP)	Contractionary Fiscal Policy The policy shifts the IS curve to the left, decreasing income and the interest rate (y1<y0 and r1<r0). The lower interest rate encourages the search for more attractive investments abroad. To avoid a rise in the exchange rate, the government sells part of its foreign currency reserve (in exchange for local currency), thus decreasing the money supply (shifting the LM to the left until it coincides with the BP equilibrium)

IS-LM-BP (Perfect Mobility); Flexible Exchange Rates

Expansionary Fiscal Policy The policy shifts the IS curve to the right. The new equilibrium is higher income with more interest. With more interest, foreign investment in the country increases. This lowers the exchange rate (appreciates the local currency). With a lower exchange rate, our foreign savings increase, shifting the IS to the left until it returns to its original point.	Contractionary Fiscal Policy The policy shifts the IS curve to the left. The new equilibrium is one of lower income with lower interest rate. The new interest rate makes investing in the country less attractive. This increases the exchange rate (depreciates the local currency). With the higher exchange rate, our foreign savings decrease, shifting the IS to the right until it returns to the original point.	Expansionary Monetary Policy The policy shifts the LM curve to the right, increasing income and decreasing the interest rate. With the lower interest rate, foreign investment in the country decreases. This increases the exchange rate (depreciates the local currency). With the higher exchange rate, there is a decrease in foreign savings, shifting the IS curve to the right to the point along LM1 that is equilibrium in BP.	Contractionary Monetary Policy The policy shifts the LM curve to the left, lowering income and raising the interest rate. With the higher interest rate, foreign investment in the country increases. This lowers the exchange rate (appreciates the local currency). With the lower exchange rate, there is an increase in foreign savings, shifting the IS curve to the left to the point along LM1 that is equilibrium in BP.

Subtitle:

IS = Equilibrium of the Real Market

LM = Financial Market Equilibrium

BP = Balance of Accounts Abroad

Y = GDP

r = Real Interest Rate

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