Floating Exchange Rates
(Figure 23.2)
Expansionary Monetary Policy

Initially, this economy is at point E0. Point E0 represents a payments balance of zero. Expansionary monetary policy causes the LM curve to shift to the right. Click the Shift LM Curve button to show the change on the graph. At point T1, there is a payments deficit. As a result, the country's currency depreciates. The FE and IS curves shift to the right and external balance is reestablished at E1. Click the Shift FE & IS Curves button to show this change on the graph.
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