Assume that Sweden is a small open economyin short-run equilibrium with a flexible exchange rate. To improve the situation for Swedish small- and medium sized firms, the central bank suddenly decides to inject more liquidity into the bank system, thus improving the loan conditions for the firms.

(Note that when describing the effects in A-D below, both the direct and the eventual indirect effects must be included.)

C. Describe shortly the effects on the foreign exchange market and the exchange rate (defined as number of units of foreign currency per unit of SEK). Which curves are shifting, why do they shift and in what direction?

D. Describe shortly the effects on the overall economy, by explaining the shifts and movements in the IS-LM-diagram.How do the balance-of-payments change during the process?