Re: DSE 2006
Posted by Chinni18 on Jun 06, 2012; 6:33am
URL: http://discussion-forum.276.s1.nabble.com/DSE-2006-tp7577468p7577491.html
An increase in foreign income leaves unchanged the equilibrium output of a small open economy with uncovered interest parity and flexibe exchange rates. This is because increase in foreign income causes the IS curve to shift upwards and to the right, causing interest rates to rise and thus the domestic currency to appreciate. Any rise in income which occurs is thus countered by the fact that capital inflows will cause exports to deteriorate. In fact, this mechanism is the reason why most small open economis prefer flexible exchange rate regimes: it insulates them from foreign originated disturbances.
Refer Mankiw for a detailed explanation
URL: http://discussion-forum.276.s1.nabble.com/DSE-2006-tp7577468p7577491.html
An increase in foreign income leaves unchanged the equilibrium output of a small open economy with uncovered interest parity and flexibe exchange rates. This is because increase in foreign income causes the IS curve to shift upwards and to the right, causing interest rates to rise and thus the domestic currency to appreciate. Any rise in income which occurs is thus countered by the fact that capital inflows will cause exports to deteriorate. In fact, this mechanism is the reason why most small open economis prefer flexible exchange rate regimes: it insulates them from foreign originated disturbances.
Refer Mankiw for a detailed explanation
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