Using the IS-LM-FX Model and its diagram below, show how monetary and fiscal policies changes suggested bellow will impact in the short run:

1) the US output

2) the US interest rate and

3)The US Dollar-Chinese yuan () exchange rate

a)The US Congress is about to pass CARES bill with the following policy changes:

a large payroll tax cut and increased spending on small business loan program support.

Below the diagram, explain what will happen and state whether the dollar will appreciate, depreciate or remain stable.Assume that Chinese fiscal and monetary policy remain unchanged and that the Chinese government in no way intervenes to affect the dollar-yuan exchange rate.

(Hint: Consider the increased spending on small business effect only first!)

b)The Fed decides to lower the federal funds rate by one percent to help the economy adjust to the shocks of the Covid- 19 (Hint: For part (b) consider the monetary policy changes only and ignore the tax cut effect!)

PART 3: Bonus Section

Instructions:

Part three of this exam is a multiple-choice bonus section on the readings other than the text book.

Each question is worth one point.

Please answer the questions in the space provided.