Assume the home economy is a small open economy. It initially starts in trade balance with output at equilibrium. There is a sudden shift in preferences away from the home country's exports and towards the exports of their competitors (i.e. a reduction of \(\sigma\) in the home economy). Are the following statements about the new medium-run equilibrium true or false? Justify your answers and use \(A D-B T-E R U\) diagrams where appropriate.

(a) This shock will increase the level of output in the home economy if you assume a downward-sloping ERU curve.

(b) This shock will have no effect on world output.

(c) This will lead to an improvement in the trade balance in the home economy.