Consider an open economy with a flexible exchange rate. LetISstand for the product market equilibrium condition,LMfor the financial market equilibrium condition, andIPfor the interest parity condition.

Show the equations for theIS, LMandIPcurves, defining the symbols you use

Explain in words why the 3 curves in theISLMIPdiagram have their particular slopes.

In anISLMIPdiagram, show the effects on output and the exchange rate of a large fall in aggregate demand, followed by a cut in the interest rate to 0 by the central bank