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)

2. Compare and contrast the effect of a decrease in the Investment (negative shock on investment) on the Home's economy under fixed and floating exchange rate regimes. Use the IS-LM-FX model for each case (flexible and fixed exchange rates). Note: Assume you start from potential 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.

a)Flexible Exchange Rates

b)Fixed Exchange Rates