Friday, June 6, 2008

Earlier conclusion about closed economy

An earlier conclusion we arrived at when discussing the closed
economy was:

The bigger the multiplier the flatter the IS curve. Since the open economy multiplier is smaller than that of a closed economy, the IS curve for an open economy is therefore steeper than that for a closed economy.

The position of the IS curve is still affected by the autonomous expenditure components. Hence, when we are looking at an open economy changes in X and M will also affect the position of theIS curve. This therefore means that changes in the real exchange rate and the income of the foreign country which affects X and M also affects the position of the IS curve.

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