Consider an open economy with a flexible exchange regime in medium run equilibrium. Suppose the central bank believes the actual and target rate of inflation are too high, and so begins to tighten monetary policy. a) Show the IS-LM, AS-AD and interest parity (IP) diagrams for this economy in the initial equilibrium (explaining briefly the meaning behind each of the curves) (5 marks) Use these diagrams to illustrate your answers to the following: a) Explain the impacts in the short run of monetary policy contraction on output, the interest rate, the nominal exchange rate, and the real exchange rate. (5 marks) b) Explain the impacts in the medium run of monetary policy contraction on output, the interest rate, the nominal exchange rate, and the real exchange rate. (8 marks) Consider an open economy with a flexible exchange regime in medium run equilibrium. Suppose the central bank believes the actual and target rate of inflation are too high, and so begins to tighten monetary policy. a) Show the IS-LM, AS-AD and interest parity (IP) diagrams for this economy in the initial equilibrium (explaining briefly the meaning behind each of the curves) (5 marks) Use these diagrams to illustrate your answers to the following: a) Explain the impacts in the short run of monetary policy contraction on output, the interest rate, the nominal exchange rate, and the real exchange rate. (5 marks) b) Explain the impacts in the medium run of monetary policy contraction on output, the interest rate, the nominal exchange rate, and the real exchange rate. (8 marks)