True or False?
The correct answer is false. It is true that rest-of-world output, prices and interest rates are important determinants of the domestic levels of output, employment and prices under fixed exchange rates. But exogenous domestic factors are also important. The fixed level of domestic prices under less-than-full-employment conditions and the full-employment level of domestic output when wages and prices are flexible are important determinants of domestic goods market equilibrium, as are exogenous shifts of domestic consumption, investment and net exports.
You should recall from earlier modules that changes in ΦBT represent exogenous shocks to net exports and changes in a and δ represent exogenous shifts in the respective levels of domestic consumption and investment.