Directions: Please answer the following questions and draw graphs when

required. Explain your logic and show steps. Graphs have to be labeled and you

have to show the changes in all the variables (when required)

3. For each of the following situations, use the IS-LM-FX model to illustrate the effects of the shock and the policy response. (Note: Assume the government responds by using monetary policy to stabilize output.) For each case, state the effect of the shock on

the following variables (increase, decrease, no change, or ambiguous): Y, i, E, C, I, TB, after the policy response.

a.Increase in Foreign Prices (P*)

a.1. Floating exchange rates

a.2. Fixed exchange rates

b.Government spending decreases

b.1. Floating exchange rates

b.2. Fixed exchange rate

c.Money supply decreases

c.1. Floating exchange rate

c.2. Fixed exchange rate