a. Presume the foreign and domestic interest rates are both initially equal to 4%. Now suppose the foreign interest rate rises to 6%. Describe what effect this will have on the exchange rate. Also explain what should occur for the interest parity condition to be restored.
b. Suppose the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and describe what effect an increase in government spending will have on the domestic economy. In your graphs, clearly label all curves and equilibrium.
c. Suppose the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and describe what effect expansionary monetary policy will have on the domestic economy. In your graphs, clearly label all curves and equilibrium.
d. Suppose that policy makers are pursuing a fixed exchange rate regime. Now suppose that the foreign interest rate falls. Discuss what policy makers should do to maintain the pegged exchange rate. Also discuss what effect this will have on domestic output and net exports.
e. Suppose the exchange rate is fixed. Using the IS-LM model, graphically illustrate and describe what effect an increase in consumer confidence will have on the domestic economy. In your graphs, clearly label all curves and equilibrium.