2 Mon.policy under floating exchange rates Y =C(Y-T)+I(r*)+G+NX(e) M/P L(r*,Y) An increase in M shifts e LM'LM LM*right because Y must rise to restore equilibrium in the money market. e Results: e △e<0,△>0 yY CHAPTER 12 Aggregate Demand in the Open Economy slide 12slide 12 Y e M P  L(r * ,Y ) Y  C (Y T )  I (r *)  G  NX (e) e1 Y1 1 * LM 1 * IS Y2 2 * LM e2 An increase in M shifts LM* right because Y must rise to restore equilibrium in the money market. Results: e < 0, Y > 0 2