Answer to Question #289273 in Economics for David

Question

Consider an economy with a flexible exchange rate and high capital mobility. The

government wants to raise income but does not want the exchange rate to change. Use IS/LM

framework to show how it must change its monetary and fiscal policies.

Answer 1

If the government wants to raise income but does not want the exchange rate to change, then it should use the mix of monetary and fiscal policies, for example, through increase in government purchases, but also through open market sale.