Consider a small open economy with fi xed nominal exchange rate (E),
fixed domestic price level (P) and fixed foreign price level (Pstar). . The goods market equilibrium condition is Y=C+I+G+X-(IM/Real cexchange rate)
DSE,2012,58-Write the goods market clearing level of output as a function of the real exchange rate and other parameters. If you plot this relationship between Y and real exchange rate in the Y and real exchange rate plane (with real exchange rate on the vertical axis),
you will get
(a) A positively sloped schedule if the Marshall-Lerner condition is satisfi ed
(b) A negatively sloped schedule if the Marshall-Lerner condition is satis-
ed
(c) A positively sloped schedule irrespective of the Marshall-Lerner condi-
tion
(d) A negatively sloped schedule irrespective of the Marshall-Lerner con-
dition
Locked
