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    IS-LM graph

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    With the help of an IS-LM graph, explain in what direction a government should change its monetary and fiscal policies if it wants to make net exports positive, that is, to run a trade surplus.

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    Solution Preview

    The simple and dirty answer to that is to make your currency cheap, and let other currencies appreciate against your currency. This will lower the price of your goods in other countries and make your exports more competitive. At the same time it will make other countries' goods costlier for your home market and lower imports. The net impact will be an increase in exports and a reduction in imports, or an increment in net exports.

    To make your currency cheaper you will have to reduce ...

    Solution Summary

    Equilibrium real GDP is discussed. The direction a government should change its monetary and fiscal policies if it wants to make net exports positive, that is, to run a trade surplus is explained.

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