Assume you are in a small open economy with flexible exchange rates. The economy experiences a permanent positive demand shock.

(a) Draw the \(P C-M R\), the \(I S-R X\) and the \(A D-E R U\) diagrams to help you explain the path back to medium-run equilibrium.

(b) Draw a graph of the real exchange rate over time and give a brief explanation of its path.

(c) How does the medium-run equilibrium vary from that which would occur in a closed economy subjected to the same shock?