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In 2014 Venezuela began experiencing some of the worst hyperinflation. I wanted to know how this situation would be represented on a IS LM FX model, and the consequences of the hyperinflation.

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  • $\begingroup$ Please clarify your specific problem or provide additional details to highlight exactly what you need. As it's currently written, it's hard to tell exactly what you're asking. $\endgroup$
    – Community Bot
    Nov 24 at 7:20
  • $\begingroup$ How do you represent hyperinflation in a model with fixed prices? $\endgroup$ Nov 24 at 9:16
  • $\begingroup$ @GradaGukovic prices in IS LM are not fixed $\endgroup$
    – 1muflon1
    Nov 24 at 12:37
  • $\begingroup$ @1muflon1 of course they are fixed. The IS curve represents the set of possible equilibria on the goods market and the LM - the set of the equilibria on the money market. Prices are present only in the LM equation and they are exogenous there. If the goods equilibrium changes ( for example G goes up) the interest rate adjusts, but prices stay the same. $\endgroup$ Nov 24 at 15:42
  • $\begingroup$ @GradaGukovic no prices are not exogenous in IS-LM. Both IS-LM curves can shift the IS-LM does not assumes these curves are fixed. For example, if IS is fixed and there is monetary expansion that will shift LM curve to the right. LM would intersect IS at a new point. Next all points of intersection between IS-LM can be traced on new output-price diagram where they will for aggregate demand curve. You will see that all these intersections will give you downward sloping AD curve. So different points of intersection between IS-LM are associated with different price level. If you don’t believe $\endgroup$
    – 1muflon1
    Nov 24 at 16:19

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