Please complete all parts: For reference$-$we use the goods market, IS$-$LM Curve, FX Market, and Money Market graphs for finding the solutions, the demand Function is D$=$Consumption$($Yh$-$Taxesh$)+$Investment$($Interest Rates$)+$Government Spending$+$Trade Balance$(($Exch Rt H$/$F x Pf$/$ph$),($Yh$-$Taxesh$),($Yf$-$Taxesf$)$:

Aggregate Demand in an Open Economy.

a$.(5$ points$)$ Write down and plot the demand function reviewed in class.

Analyze the effects of the following shocks on the equilibrium output in the goods market at home.

Make sure you include the economic intuition with the corresponding plot explaining the changes.

b$.(5$ points$)$ A depreciation of the home exchange rate.

c$.(5$ points$)$ A depreciation of the foreign exchange rate.

d$.(5$ points$)$ A decrease in government expenditure in the home country.

e$.(5$ points$)$ A technology discovery that leads to new and profitable investment opportunities.

f$.(5$ points$)$ A decrease in the interest rate.

Effect of a decrease in money supply under a floating exchange rate in the short run $($prices

are fixed$).$

Assume the economy is in its long run equilibrium, and the central bank implements a temporary

decrease in the money supply at Home.

a$.(10$ points$)$ Show how the decrease in the money supply affects the money market and LM

curve. Use the appropriate graphs and describe the changes using economic intuition.

b$.(10$ points$)$ Show how the decrease in the money supply affects the interest rate, output, and

exchange rate in equilibrium. Use the IS$-$LM diagram and FX market to show the changes.

Effect of a decrease in government expenditures under a floating exchange rate in the short

run $($prices are fixed$).$

Assume the economy is in its long run equilibrium, and the government decreases its expenditures at

Home.

a$.(10$ points$)$ Show how the decrease in government expenditures affects the goods market,

the FX market and the IS curve. Use the appropriate graphs and describe the changes using

economic intuition.

b$.(10$ points$)$ Show how the decrease in in government expenditures affects the interest rate,

output, and exchange rate in equilibrium. Use the IS$-$LM diagram and FX market to show

the changes.

c$.(10$ points$)$ Do we see the crowding out effect? Explain.

d$.(20$ points$)$ How does the effects in the interest rate, output, and exchange rate change when

we consider a fixed exchange rate? Use the IS$-$LM diagram and FX market to show the

changes and make sure you explain the differences.