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Question
An economy starts in an equilibrium condition in three markets under flexible exchange rate regime and perfect capital mobility. If the central bank in a foreign country increases its interest rate, what would happen in the domestic country?
a. domestic currency depreciates and the IS curve shifts to the right.
b. domestic currency appreciates and the IS curve shifts to the left.
c. domestic currency depreciates and the LM curve shifts to the right.
d. domestic currency appreciates and the LM curve shifts to the left.
Answer
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