Macroeconomics 5th Edition by Olivier Blanchard

Exercise 7

Flexible exchange rates and foreign macroeconomic policy.
Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.
a. In an IS-LM-UIP diagram, show the effect of an increase in foreign output, Y *, on domestic output, Y. Explain in words.
b. In an IS-LM-UIP diagram, show the effect of an increase in the foreign interest rate, i*, on domestic output, Y. Explain in words.
c. Given the discussion of the effects of fiscal policy in this chapter, what effect is a foreign fiscal expansion likely to have on foreign output, Y *, and on the foreign interest rate, i * Given the discussion of the effects of monetary policy in this chapter, what effect is a foreign monetary expansion likely to have on Y * and i *
d. Given your answers to parts (a), (b), and (c), how does a foreign fiscal expansion affect domestic output How does a foreign monetary expansion affect domestic output (Hint: One of these policies has an ambiguous effect on output.)