Country X's major trading partner is Country Y, a large open economy. The economy of Country Y is sufficiently large that it determines the world interest rate. (Thus the world interest rate is determined by the intersection of Country Y's IS and LM curves.) Country X, on the other hand, is economically small so that the interest rate in Country X does not deviate from the world interest rate. Changes in Country X have no effect on Country Y.
a. Assuming flexible exchange rates, and assuming a fixed price level, what are the effects on Country X of a monetary expansion in Country Y?
b. Assuming flexible exchange rates, and assuming a fixed price level, what are the effects on Country X of a fiscal expansion in Country Y?