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Question 2 (Text Ref: Chap 20) Flexible exchange rates and foreign macroeconomic policy Consider an open economy with flexible exchange rates. Let IP stand for the (uncovered) interest parity condition. a. In an IS LM-IP diagram, show the effect of an increase in foreign output, Y*, on domestic output, Y. Explain in words. (4 marks) b. In an IS-LM-IP diagram, show the effect of an increase in the foreign interest rate, i*, on domestic output, Y. Explain in words. (4 marks) c. Given the discussion of the effects of fiscal policy in this chapter, what effect is a foreign fiscal expansion likely to have on foreign output, Y*, and on the foreign interest rate, i*? Given the discussion of the effects of monetary policy in this chapter, what effect is a foreign monetary expansion likely to have on Y* and i*? (4 marks) d. Given your answers to parts (a). (b) and (c), how does a foreign fiscal expansion affect domestic output? How does a foreign monetary expansion affect domestic output? (Hint: One of these policies has an ambiguous effect on output.) (4 marks)