Question
1. [24 points] Russia's invasion of Ukraine is causing energy prices to soar in the euro area (at an annual rate of 39% according to
1. [24 points] Russia's invasion of Ukraine is causing energy prices to soar in the euro area (at an annual rate of 39% according to the Economist, June 2022).
(1.b) The euro area is an open economy. Consider the open-economy IS/LM model and assume the euro () is freely floating against the US dollar ($). What will be the effects of the euro area's fiscal policy you designed in (1.a) on euro area output and interest rates, the /$ exchange rate, and on US output and interest rates? How would your exchange rate answer change if the Fed responds by tightening monetary policy in the US?
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