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answer with 4 diagrams to explain.

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Answer #1

Interest rate BP line LM1 LM IS ncome (a) A decline in money supply Under flexible exchange rate - When monetary authority attempt to decrease the money supply through open market operation, then LM curve shift to LM1 at intersection point B which is the Balance of payment (BP) line is become steep. The high interest rate creates capital inflow and appreciation exchange rate. Thus, the higher interest rate decline the money supply decease the export and increase the import. Here monetary policy effectively work

Interest rate LM1 LM BP line IS Y1 Y Income Answer- (a) A decline in money supply Under fixed exchange rate - When monetary authority attempt to decrease the money supply through open market operation, then LM curve shift to LM1 at intersection point B which is above the Balance of payment (BP) line. The high interest rate creates capital inflow and upward pressure on domestic exchange rate. Thus, to maintain fixed exchange rate the monetary authorities' sale their own currency which is increase the money supply and LM curve back to their original position. Hence, the monetary policies in effective under fixed exchange rate.

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Answer 1

Interest rate BP line LM1 LM IS ncome (a) A decline in money supply Under flexible exchange rate - When monetary authority attempt to decrease the money supply through open market operation, then LM curve shift to LM1 at intersection point B which is the Balance of payment (BP) line is become steep. The high interest rate creates capital inflow and appreciation exchange rate. Thus, the higher interest rate decline the money supply decease the export and increase the import. Here monetary policy effectively work

Interest rate LM1 LM BP line IS Y1 Y Income Answer- (a) A decline in money supply Under fixed exchange rate - When monetary authority attempt to decrease the money supply through open market operation, then LM curve shift to LM1 at intersection point B which is above the Balance of payment (BP) line. The high interest rate creates capital inflow and upward pressure on domestic exchange rate. Thus, to maintain fixed exchange rate the monetary authorities' sale their own currency which is increase the money supply and LM curve back to their original position. Hence, the monetary policies in effective under fixed exchange rate.