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IS-LM-BP Imperfect Mobility; Fixed Exchange

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 would lower the exchange rate (appreciates the local currency). The government can then neutralize the exchange rate effect with bonds and break even at the point of Y1 or carry out expansionary monetary policy, balancing at Y2.	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). The government can counteract this via the bond market, ending at Y1. It can also make monetary policy contractionary, ending at Y2, BP equilibrium.	Expansionary Fiscal 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). The government can neutralize the exchange rate via bonds, staying at Y1,R1, or make a contractionary monetary policy, returning to the starting point.	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). The government can neutralize this effect via bonds, maintaining the equilibrium at Y1; alternatively, it will make the monetary policy expansionary and we will return to the starting point.

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

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.	Política Fiscal Contracionista 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 in the Balance of Payments

Y = GDP

r = Real Interest Rate

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