3 (65 marks) (Open Economy IS-LM and Dornbusch Model): Consider the following open-economy IS-LM model, where capital is perfectly mobile across countries. Assumptions: i) the domestic and foreign price Pt and P t are constant at period t. 2. UIP condition: it = it + Et(st+1) st holds, where st+1 = ln(St+1) and st = ln(St), and St is an exchange rate between a Home currency and foreign currency. 3. Standard IS-LM setting, where IS curve is given by Yt = Ct(Yt Tt) + Gt + It + NXt(Yt, Y t , St). a) (5 marks) Argue how the net export NX changes with respect to Yt, Y t , and St. Note Y t is the GDP for the foreign country. You should provide reasons for your answer. b) (10 marks) By substituting the UIP condition into IS curve, obtain the modified open economy IS curve. Is the IS curve flatter or more sloped than the closed economy IS curve? Prove the reason for your