Assume that an open economy with a floating exchange rate is described by the equations:

C = 0.5(Y-T)

T= 1000

I= 1500 -250r

G= 1500

NX= 1000 - 250e

(M/P)^d = 0.5Y - 500r

M= 1000

S-I= 500 - 250r

P= 2

r* = 1

a. Derive the equation for the IS* curve.

b. Derive the equation for the LM curve.

c. Solve for equilibrium Y.

d. Solve for NX and e.

e. Using the information from parts a. to be part d. above, graphically illustrate on a clearly labelled diagram, the short-run impact of contractionary fiscal policy on the exchange rate and level of output in this small open economy.

f. Assuming that the economy adopted a fixed exchange rate system, illustrate on a clearly labelled diagram, the impact of contractionary fiscal policy.

g. In one sentence, explain the type of intervention needed to maintain the fixed exchange rate proposed in part f. above.