Consider a domestic and foreign economy, each with flexible exchange rates.

(a) Suppose there is a foreign fiscal expansion. Explain in words two channels by which this affects home country output. What is the net effect on domestic output?

(b) Suppose there is a foreign monetary expansion. Explain in words two channels by which this affects home country output. What is the net effect on domestic output?

(c) In an IS-LM-IP diagram, show the effect on domestic output Y of a foreign fiscal expansion. Briefly summarise in words the effect on IS, i, IP, E, and Y, and comment on the size of the net output effect.

(d) In an ISLMIP diagram, show the effect on domestic output Y of a foreign monetary expansion. Briefly summarise in words the effect on IS, i, IP, E, and Y, and comment on the size of the net output effect.

(e) How could the domestic central bank help the home economy get the maximum output effect following the foreign fiscal expansion in part (c)? Explain using a diagram.