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IS-LM-BP (No Mobility); Fixed Exchange

Expansionary Fiscal Pol The policy shifts the IS curve to the right. The new equilibrium is a deficit in the BP, that is, a shortage of foreign currency in the market. The government, to fill this gap, sells foreign currency on the market and absorbs local currency. This will shift the LM curve to the left until equilibrium with BP.	Contractionary Fiscal Policy The policy shifts the IS curve to the left. The new equilibrium is a surplus in the BP, that is, excess foreign currency in the market. The government, to control this, buys foreign currency on the market and injects local currency. This will shift the LM curve to the right until equilibrium with BP.	Expansionary Monetary Policy The policy shifts the LM curve to the right. This causes a shortage of foreign currency in the market. To compensate for this, the government then sells its foreign currency reserves (exchanging foreign currency for local currency, effectively decreasing the local currency supply). This will shift the LM curve to the left again until equilibrium.	Contractionary Monetary Policy The policy shifts the LM curve to the left. This causes a shortage of local currency in the market. To compensate for this, the government then buys foreign currency (exchanging foreign currency for local currency, effectively increasing the supply of local currency). This will shift the LM curve to the right again until equilibrium.

IS-LM-BP (No Mobility); Flexible Exchange

Subtitle

IS = Equilibrium of the Real Market

LM = Financial Market Equilibrium

BP = Balance in the Balance of Payments

Y = GDP

r = Real Interest Rate

Expansionary Fiscal Policy The policy shifts the IS curve to the right. The new balance is at a higher (depreciated) exchange rate. The new exchange rate causes a shift in IS and BP to the right to the break-even point.	Contractionary Fiscal Policy The policy shifts the IS curve to the left. The new balance is at a lower (appreciated) exchange rate. The new exchange rate causes a shift in IS and BP to the right to the break-even point.	Expansionary Monetary Policy The policy shifts the LM curve to the right. This increases the exchange rate (depreciates the local currency). The effect of the depreciated exchange rate is a shift in IS and BP to the right until the new equilibrium (Y2,r2).	Contractionary Monetary Policy The policy shifts the LM curve to the left. This lowers the exchange rate (appreciates the local currency). The appreciated exchange rate causes a shift in IS and BP to the left until the new equilibrium (Y2,r2).

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