A Small Open Economy with a Floating Exchange Rate Is $I S _ { 1 } ^ { * }$

question 91

Multiple Choice

A small open economy with a floating exchange rate is initially in equilibrium at A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * } .$ If the establishment of a new government in the country decreases the risk premium, then $L M _ { 1 } ^ { * }$ will shift to _____ and $I S _ { 1 } ^ { * }$ will shift to _____.

• A) \(L M _ { 2 } ^ { * } , I S _ { 2 } ^ { * }\)
• B) \(L M _ { 2 } ^ { * } , I S _ { 3 } ^ { * }\)
• C) \(L M _ { 3 } ^ { * } , I S _ { 2 } ^ { * }\)
• D) \(L M _ { 3 } ^ { * } , I S _ { 3 } ^ { * }\)

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Definitions:

Consumer's Surplus

The difference between what consumers are willing to pay for a good or service and what they actually pay.

Earplugs

Devices inserted in the ear canal to protect the ears from loud noises, water, foreign bodies, or excessive wind.

Utility Function

A mathematical representation that ranks an individual's preferences over a set of goods or outcomes.

Equivalent Variation

A measure in economics that calculates the change in income required to reach the utility level before a price change, keeping the new prices constant.