Price level, P
Exchange rate, e
LRAS
LM*
Po
Interest rate,
Y
(Figure 1)
Equilibrium
interest
rate
Long-run
equilibrium
SRAS
Equilibrium
exchange rate
Equilibrium
income
AD
IS*
Income, output, Y
Income, output, Y
(Figure 2)
LM
IS
Equilibriurr level
of incomo
(Figure 3)
Income, output, Y
Suppose Livania is an open economy and uses flexible exchange rate regime. The economy is
at its initial equilibrium. Then, the central bank increased money supply.
Use an appropriate diagram to explain the impact of the rising money supply on equilibrium
national income, exchange rate, consumption expenditures, investment expenditures in this
open economy. (You are supposed to give a clear and full explanation of which of the given
figures you use)
