Problem 1 (30 points) Consider a small open economy with perfect capital mobility and a xed exchange rate sf. After years of stability the country is hit by a strong negative demand shock that is completely country-specic. a. Use the framework of MundellFleming to describe the short-run impact of the neg- ative demand shock. Your answer should include a picture and a full description of the changes in the relevant variables. b. Use the MundellFleming framework to describe what happens if investors start to charge a risk premium on government bonds out of fear that the country's public nances have become unsustainable after the demand shock. c. What can the monetary authorities do to prevent a further deterioration of the econ- omy? (:1. Explain why the same type of shock can force a country into default in an incomplete monetary union like the EMU