Exercise 1 At the beginning of the 1980s, the president of the United States Federal Reserve decided to adopt a strong contractionist monetary policy, seeking to contain the advance of domestic inflation rates. The result was an expressive increase in American interest rates. Consider a small and open foreign country. Using the Mundell
Fleming model, analyze the effect of the American contractionist monetary policy on this foreign country in the following settings:

a. The economy of the foreign country operates on a flexible exchange rate regime.

b. The economy of the foreign country operates on a fixed exchange rate regime.