Question 3 (5 points): Explain and illustrate how the central bank from country A would react, everything else held constant. For simplicity, assume no time lag for policy to affect the economy, the economy is starting at potential output, and country B is a major trading partner.

Question 3-a (2.5 point): Country B makes it harder for country A's investments to buy B's stock.

To illustrate that change, plot NCO and NX on one graph, and AE on the second graph. For your analysis, choose as a starting point (marked A), an economy operating at potential GDP (Y¹=Y*). Mark initial curves as NCO¹, NX¹, and AE¹, and every subsequent shift with a higher number, like NCO², NX², and AE² and so on, and any subsequent point as B, C, D and so on (points need to be on both graphs).

Question 3-b (2.5 point): There is a decrease in demand for country A's goods by the consumers of country B.

To illustrate that change, plot NCO and NX on one graph, and AE on the second graph. For your analysis, choose as a starting point (marked A), an economy operating at potential GDP (Y¹=Y*). Mark initial curves as NCO¹, NX¹, and AE¹, and every subsequent shift with a higher number, like NCO², NX², and AE² and so on, and any subsequent point as B, C, D and so on (points need to be on both graphs).