A flexible exchange rate combined with a willingness to change the domestic interest rate can increase the effectiveness of monetary policy in an open economy. Consider an economy that suffers a fall in business confidence (which tends to reduce investment)

What effect would a decrease in foreign output (Y*) instead have on the domestic economy? Use the IS-LM-IPR diagram to illustrate the impact on Y, i and E and explain what would happen (i.e. increase/decrease) to the other components of aggregate demand (C,I and NX)