AD in the Open Economy

Question 1

What does the LM curve represent in open economy

Answer 1

Upward sloping in Y/R space as higher income levels lead to higher R levels to maintain money market equilibrium

Question 1

What does the IS curve represent in the open economy and what does AD now include

Answer 1

Downward sloping in R, Y space as increases
AD in open economy now includes net exports which are influenced by ER and foreign income

Question 2

What does the BP curve show

Answer 2

Represents combos of Y and R for which there is equilibrium in the BOP

Question 3

What does the slope of BP curve depend on

Answer 3

Perfect capital mobility: BP is horizontal at the world interest rate.
Imperfect capital mobility: BP is upward sloping.