The IS LM Open Economy Model with a fixed money supply
A revision sheet for the IS-LM open economy model for a small open economy model with sticky prices and a flexible exchange rate.
The Output Market and Money Market clear where the prevailing world interest rate meets the LM curve. The IS (or Output Demand Curve, Yd) must also intersect this point, and this can only happen through a change in NX, which is a function of the exchange rate (expressed as domestic currency/foreign currency) and the foreign Price Level, P*. If domestic demand – where LM = Yd – is insufficient to clear the market, then NX must make up the difference.
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Here is the Small Open Economy with flexible prices