Using the IS/LM/BP Framework, Explain How Two of the Following

question 9

Essay

Using the IS/LM/BP framework, explain how two of the following shocks impact on the domestic economy under flexible exchange rates and under fixed exchange rates.
(a) an increase in the foreign rate of interest
(b) a decrease in foreign income
(c) a decrease in foreign prices

---

Definitions:

Theory Perseverance

Proposes that once the mind draws a conclusion, it tends to stick with that conclusion unless there is overwhelming evidence to change it.

Counterfactual Thinking

Imagining alternatives to past or present events or circumstances.

Illusory Correlation

The perception of a relationship between two variables when none exists, often leading to confirmation of erroneous beliefs.

Magical Thinking

The belief that one's thoughts, words, or actions can influence the outcome of events in the physical world in a manner not governed by the laws of physics or logic.