Consider a small open economy with fixed nominal exchange rate (E),
fixed domestic price level (P) and fixed foreign price level (P). Let R be the
corresponding real exchange rate. The goods market equilibrium condition
is given by the following IS equation:
Y = C + I + G + X-IM/R
where
C = c0 + c1Y represents domestic consumption
I = d1Y- d2r represents domestic investment
G represents government expenditure
X = x1Y*- x2R represents export
Y* represents income of the foreign country
IM = m1Y + m2R represents import
QUESTION 57. Suppose the rate of interest (r) as exogenously given. Then
a unit increase in the foreign price level, ceteris paribus, increases domestic
output by
(a)m1Y/R -Rx2 1
------------------- x ---
1-c1-d1+m1/R P*
(b)m1Y/R -Rx2
-------------------
R (1-c1-d1)+m1
(c) Rx2 - m1Y/R 1
------------------- x ---
1-c1-d1+m1/R P*
Locked
