An economy is described by a version of the open economy flexible exchange rate IS-MP model in which the IS curve is formed only of private consumption and the trade balance, with consumption being a decreasing function of the real interest rate: YIS(r) = C(r) + TB, with C a decreasing function of r and the MP curve is YMP(r), with Y increasing with r as usual This economy experiences a shock (subscript 1 refers to the pre-shock equilibrium, and subscript 2 refers to the post-shock equilibrium) to the level of exports such that: TB2 > TB1 Will consumption be higher or lower after the shock? Show your working and use to make a comment on the general desirability or otherwise of export led growth
