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Exhibit: Risk Premium a Small Open Economy with a Floating

Question 41

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Exhibit: Risk Premium Exhibit: Risk Premium A small open economy with a floating exchange rate is initially in equilibrium at A with IS<sub>1</sub>*; LM<sub>1</sub>*. If there is an increase in the risk premium, then LM<sub>1</sub>* will shift to _____ and IS<sub>1</sub>* will shift to _____. A) LM<sub>2</sub>* ; IS<sub>2</sub>* B) LM<sub>2</sub>* ; IS<sub>3</sub>* C) LM<sub>3</sub>* ; IS<sub>2</sub>* D) LM<sub>3</sub>* ; IS<sub>3</sub>* A small open economy with a floating exchange rate is initially in equilibrium at A with IS1*; LM1*. If there is an increase in the risk premium, then LM1* will shift to _____ and IS1* will shift to _____.


A) LM2* ; IS2*
B) LM2* ; IS3*
C) LM3* ; IS2*
D) LM3* ; IS3*

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