1. Consider a flexible exchange regime with highly immobile capital (i.e., the BP curve is steeper than the LM curve). Draw appropriate curves, labeling them IS1, LM1, and BP1. Label equilibrium income Y1 and the equilibrium interest rate i1. Click here

Graph the following curves by clicking here

Suppose the government decides to "cool off" the economy by pursuing contractionary fiscal policy. How do the IS and BP curves shift? Draw and label the new curves. Label the new levels of income and the interest rate Y2 and i2.

Comment on the effectiveness of fiscal policy in this case. Under what circumstances might fiscal policy be more effective?

Suppose the government decides to "cool off" the economy by pursuing contractionary monetary policy. How do the IS, LM, and BP curves shift? Draw and label the new curves. Label the new levels of income and the interest rate Y2 and i2.

Comment on the effectiveness of monetary policy in this case.