Under flexible exchange rates the positions of FE and LM are set exogenously. The exchange rate determines the position of IS, and endogenously adjusts so as to let IS pass through the given point of intersection between FE and LM (panel (a)).
Under flexible exchange rates the positions of FE and LM are set exogenously. The exchange ratedetermines the position of IS, and endogenously adjusts so as to let IS pass through the given pointof intersection between FE and LM (panel (a)).