A small open economy is described by the following equations:

C=50+0.75 (Y-T) I=200-20r NX=200-50e M/P=Y-40r

G=100 T=100 M=2,000 P=2 r*=4

(a) Derive and graph the IS* and LM* curves (Mundell-Fleming model)

(b) Calculate (i) the equilibrium rate and (ii) output

(c) Assume a floating exchange rate. Calculate what happens to (i) the exchange rate, (ii) income, (iii) net exports, and (iv) the money supply if the government raises taxes by 50. Use a graph to explain what you find.