Question: A country initially has achieved both external balance and internal balance. International financial capital is highly mobile, so FE curve is upward sloping and

A country initially has achieved both external balance and internal balance. International

A country initially has achieved both external balance and internal balance. International financial capital is highly mobile, so FE curve is upward sloping and flatter than the LM curve. The country has a floating exchange rate. Suppose there exists a positive international trade shock to the country, that is, its net exports dramatically increase. (a). What shifts would occur in the FE and IS curve because of the increased net exports? (b). what change in the exchange rate occurs to reestablish external balance? (c) as a result of the exchange rate change, how does the country adjust back to external balance? Illustrate this using an IS-LM-FE graph. What is the effect of all of this on the country's domestic production and income Y?

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