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Consider an open economy with flexible exchange rates. Let IS stand for the product market equilibrium condition, LM for the financial market equilibrium condition and

Consider an open economy with flexible exchange rates. Let IS stand for the product market equilibrium condition, LM for the financial market equilibrium condition and IP for the interest parity condition.

a. Explain the intuition behind the three curves in the IS-LM-IP diagram.

b. In an IS-LM-IP diagram, show the effects of fiscal expansion on domestic output, Y.

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