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State the world rate of interest
We have assumed that the world rate of interest only falls to equal R2. At point B, therefore, the domestic rate of interest is below the world rate of interest and so country A experiences an incipient balance of payments deficit. As national income in country A has increased, we assume that it also increases its demand for imports which this is equivalent to an increase in the country B's IS curve shifting from equal IS0 to equal IS1.
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