An important stepping stone along the way to the euro was a fixed exchange rates system created in 1979 called the Exchange Rate Mechanism (ERM), which tied together all member currencies at fixed rates. The most important currency in the ERM was German mark or deutsche mark (DM). German reunification in 1992 caused German government spending to rise. Germany also adopted contraction monetary policy to stabilize its economy. The UK was pegged the pound sterling to the DM. Answer the following questions using the IS-LM-UIP diagram. (20 points)

a) What would be the effect of the German reunification to Germany? Draw graphs and explain

b) What would be the effect of the German reunification to UK? Draw graphs and explain

c) What would be the effect of the German reunification to UK when Britain's decision was to exit the ERM? Draw graphs and explain