1.Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.

a)In an IS-LM-UIP diagram, show the effect of an increase in foreign output (Y^*) in domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged.

b)In an IS-LM-UIP diagram, show the effect of an increase in the foreign interest rate (i^*) on domestic output (Y) and the exchange rate (E), when the domestic central bank leaves the policy interest rate unchanged.