Final answer:
The IS-LM model for an open economy differs from the closed economy model by considering the impact of interest rates on exports and the effect of exchange rates on income.
Step-by-step explanation:
The main difference between the IS-LM model for an open economy and a closed economy lies in the inclusion of international trade and exchange rates in the open economy model. The IS-LM model for an open economy considers the impact of interest rates on exports, as well as the effect of exchange rates on income.
In a closed economy, the IS-LM model focuses only on government spending and ignores international trade. However, in an open economy, the model takes into account the interactions between interest rates, exchange rates, government spending, and international trade.
For example, an increase in interest rates in an open economy can lead to a decrease in exports as it makes the domestic currency stronger, making exports more expensive for other countries. On the other hand, a decrease in interest rates can stimulate exports by making the domestic currency weaker.