2.Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility (i.e., interest parity holds), and complete price stability (no ongoing inflation). Explain what effect a decrease in the world interest rate would have on the following domestic macroeconomic variables:

a.The stock of foreign exchange reserves.

b.The money supply.

c.Real GDP.

d.The price level.

e.The real exchange rate.