Problem
At the beginning of the 1980s, the president of the United States Federal Reserve decided to adopt a strong contractionist monetary policy, seeking to contain the advance of domestic inflation rates. The result was an expressive increase in American interest rates. Consider a small and open foreign country. Using the MundellFleming model, analyze the effect of the American contractionist monetary policy on this foreign country in the following settings:
a. The economy of the foreign country operates on a flexible exchange rate regime.
b. The economy of the foreign country operates on a fixed exchange rate regime.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.