2. Using diagrams analyze the impact on domestic Y and i

of the following independent shocks in the Fleming-Mundell model.

(5) a. Investors believe that in the foreign economy a left wing government with unsound economic policies will replace the pro business government. There is a fixed exchange rate and perfect capital mobility.

(5) b. Foreign preferences for domestic goods falls. There is a floating exchange rate and imperfect capital mobility.

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

.