2. Using diagrams analyze the impact on domestic Y and I of the following independent shocks in the Fleming-Mundell model.

a. Foreign commercial banks report a large number of their borrowers

cannot pay interest on their loans. Assume the exchange rate is floating and

capital is perfectly mobile.

b. Domestic consumption rises. There is a floating exchange rate and

imperfect capital mobility.

c. For the shock in (a) state the long run effect on domestic investment I

.