4. Use the basic version of the long-run model of a small open economy to illustrate

graphically the impact of this decline in consumer confidence on the exchange rate and

the trade balance. Assume the country starts from a position of balanced trade balance,

i.e., exports equal imports. Be sure to label:

i. the axes

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ii. the curves

iii. the initial equilibrium values

iv. the direction the curves shift

v. the new long-run equilibrium values.

5. How would your analysis change if this was a large open economy?