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Goods market clearing condition Y=C+I+G+X-M
X-M is directly related to exchange rate when Marshall-lerner condition satisfied i.e., depreciation leads to positive trade balance. So, Y and exchange curve should be upward sloping.
59.From the asset market condition and interest rate parity you can get a relationship between Y and exchange rate which is inversely related relation, and Marshal-lerner condition is not much use here because no goods market.
60. Given Marshal-lerner condition satisfied.
Goods market equation gives us positive slope cure (similar to supply curve)
Asset market and interest parity gives download sloping curve (demand curve)
G rise => supply curve shift right => exchange rate decrease , Y increase
M rise => for given output interest rate decrease => exchange rate rise (from interest parity condition) => demand curve shift upwards => exchange rate rise in equilibrium.
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