**Determination Of CF, NX And ER With The Help Of IS- LM ****Model:**

IS equation: Y = C(Y – T) + I(r) + G + NX (є) …(1)

LM equation:

M/P = L(r, Y) …(2)

Capital inflows takes place Reason: foreign investors will find it profitable to invest here because they will get a high interest rate on the loan given.

**Result:**

CF will decrease

Similarly if r falls; r < r*

ADVERTISEMENTS:

vice versa will take place.

**Relation between NX and ER:**

(i) Equilibrium interest rate is determined where:

ADVERTISEMENTS:

IS = LM

IS = LM at point E

.** ^{.}**. Equilibrium interest rate → r

_{1}

Equilibrium income level → Y_{1 }

(ii) At interest rate – r_{1}

CF is CF_{1} (Fig. b 17.5)

When CF is CF_{1}

NX is NX_{1}(Fig. c 17.5)

ADVERTISEMENTS:

ER is є_{1}

And thus equilibrium CF is CF_{1}

Where: NX is NX_{1} and ER is є_{1}