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. Foreignpreferences for domestic goods falls. There is a floating exchange rate and

imperfect capital mobility. (5)

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