ECS3703 EXAM PACK ,Section A You must answer ALL questions in this section 1. Explain (with the aid of two diagrams using the IS/LM/BP analysis) the effectiveness of expansionary fiscal policies as well as ease monetary policies in an open economy with fle

ECS3703 EXAM PACK ,Section A You must answer ALL questions in this section 1. Explain (with the aid of two diagrams using the IS/LM/BP analysis) the effectiveness of expansionary fiscal policies as well as ease monetary policies in an open economy with flexible exchange rates and perfect capital mobility. (25) Monetary Policy is effective and Fiscal Policy ineffective. Fiscal Policy i LM 6.25 E’ 5.0 BP E IS’ IS 0 Y Yn Yf Monetary Policy i LM LM’ E F 5.0 BP Expansionary fiscal policy shifts the IS to IS’. The IS’ and LM intersect at point E due to tendency of the nation’s interest rate to rise to i = 6.25. This leads to massive capital inflows and appreciation of the nation’s currency which discourages exports and encourages imports and shifts the IS’ curve back to its original position. Thus fiscal policy is ineffective. Easy monetary policy shifts the LM curve to LM' and lowers the interest to i = 3.5 at point E". The nation reaches full employment Yf. LM' curve intersects IS curve. This leads to capital outflow and a tendency of the nation's currency to depreciate which shifts the IS curve to the right to IS' (exports are stimulated and imports discouraged).L M' shifts a little to LM" (due to fall in money supply because of rising prices in the nation). Final equilibrium is at F where IS' and LM" cross on the BP curve at Yf. Thus monetary