Consider a small open economy described by the AA-DD model.Assume throughout that P stays constant.

a) Show on a graph, and explain with words, the effect of a rise in government spending on E, Y, I, and CA.

b) Suppose now that the central bank is required to keep the exchange rate fixed at its original level before the rise in government spending.What does it need to do to monetary policy to push the exchange rate back to its original level after the rise in government spending?How does this impact E, Y, R, CA, and central bank reserves?

c) If a country fixes its exchange rate, but keeps its capital markets open to international flows, what does it give up?Explain, and show.

d) In a speculative attack with fixed exchange rates, describe what happens to central bank reserves.