Suppose that the International Monetary Fund (IMF)

| November 24, 2016

Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation in a small open economy. Use the basic version of our exchange-rate model for your answers.

a.

What type of fiscal policy should the IMF propose to the government of the small open economy to generate a currency appreciation?

b.

Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy.

c.

What will happen to the trade balance of the small open economy, assuming that it started from a position of balanced trade?

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