True or False?
The statement is true. Under flexible exchange rates, small-open-economy equilibrium is determined by the intersection of the LM curve and the ZZ line and the exchange rate must adjust to ensure that the IS curve passes through that LM-ZZ intersection. Exogenous shocks to the IS curve will thus affect the exchange rate but not output. When the exchange rate is fixed, equilibrium is determined by the intersection of the IS curve and the ZZ line with LM adjusting automatically in response to the central bank's foreign exchange rate stabilization operations. Shocks to the LM curve will thus affect the equilibrium nominal money supply but not income, employment and prices.