Explain what effects reduction in the interest rate

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Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction in the interest rate that prevails in world financial markets would have on each of the following domestic variables after the economy has adjusted to a new equilibrium:

a. Real GDP

b. The domestic interest rate.

c. The central bank's stock of foreign exchange reserves

d. The real exchange rate

 

e. The current and non reserve financial accounts of the balance of payments

Reference no: EM13889228

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