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). (10 marks) Suppose that even after the government's monetary policy, it wants to hold the exchange rate St at S. Provide reasons why this is not possible citing "impossible trinity