Assume an economy's government responds by using monetary policy to stabilize output if the economy is hit be a shock. Assume exchange rate is flexible/floating.

Assume the foreign interest rate i decreases.

(a) Illustrate the shifts of the IS, LM, DR, AND FR curves due to the shock, and due to the policy response

(b) why do the curves shift and how for the shock and then the policy response using the equilibrium conditions for the goods, money, and foreign exchange market; is the policy response contractionary or expansionary?

(c) state the combined effect of shock and policy response on income Y, interest rate i, and current spot exchange rate E, respectively

(d) Explain why and how private consumption C, investment I, and the trade TB are affected by the combined effect of shock and policy response. How is exchange rate E affected overall?