Question

A small open economy with a floating exchange rate is initially in equilibrium at A with IS*1, LM*1. Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.A. LM; LM*2B. LM; LM*3C. IS; IS*2D. IS; IS*3

Answer 1

Option D is correct

Step-by-step explanation:

The curve would shift to the left because there Is an increase in import product that is the I + G + X curve would fall as the S + T +IM curve rises due to increase in IM(import product) causing the income fall.