Reference no: EM132476891

The government of Peru believes that the country's economy is stagnating and implements a major increase in public expenditure in order to stimulate the economy during the current year. Because the government has problems borrowing in domestic and international credit markets these days, it decides to have the Central Bank of Peru print money and buy government bonds, so that the government will have sufficient money to spend. Assume that the exchange rate is flexible and the interest parity condition holds. Also, assume that the price level is exogenously determined and the conditions in the rest of the world remain unchanged. Finally, assume that the government's policy is viewed as temporary and has no impact on the course of the economy beyond the current year. How would this policy affect Peru's LM curve this year? How would this policy affect Peru's IS curve this year? How would this policy affect the equilibrium real income and the nominal interest rate in Peru? How would this policy affect the levels of private consumption, investment, and net exports of Peru's economy this year?