C_0, I_0, NX_0 < 0 ; T_0 = 0 -> decrease in consumption, investment, net exports, no change in tax

So government increased spending to address this, i.e. G_0 > 0

However, A_0 C_0 +cT_0 + I_0 + G_0 + NX_0 < 0

At the same time, World policy rate decreased, so i* < 0. Assume that 1/b A_0 = i*

The small open economy has arelatively mobile financial account and is under a flexible exchange rate regime. Using the Mundell-Fleming model, derive the ff.:

a. e_E in terms of i* and the model's parameters. State if change is positive or negative.

b. Y_E and i_E in terms of i* and the model's parameters. State if change is positive or negative.

c. Show the changes in diagram in the Y- i space and explain.

* _ 0 denotes exogenous variables; _E denotes equilibrium variables