Assumption of a Purely Domestic Shock in Comparative Policy Analysis
When comparing the effects of an aggregate demand shock across different monetary policy regimes, a common simplifying assumption is that the shock is purely domestic. This means that the foreign economy is assumed to remain unchanged, isolating the analysis to the home country's policy response.
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Assumption of a Purely Domestic Shock in Comparative Policy Analysis
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Learn After
An economic model is used to compare how different monetary policy systems in a home country would respond to a sudden, large increase in domestic business investment. To isolate the effects of the policy response, the model assumes this is a 'purely domestic' event. What is the primary consequence of this specific assumption for the model's setup?
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