Consider an open economy with flexible exchange rates. Let UIP stand for the uncovered interest parity condition.

a. [4 marks] In an IS-LMUIP diagram, such as Figure 19-2 in the textbook, when there is a decrease in the domestic interest rate, i, what will happen to the IS, LM and UIP curves, respectively? And what will happen to domestic output (Y), the exchange rate (E), and the different components of GDP (i.e., C, I, G, NX)? Explain in words.

b. [4 marks] In an IS-LMUIP diagram, such as Figure 19-2 in the textbook, when there is a decrease in the foreign interest rate, i to the power of asterisk times end exponent, and the domestic central bank leaves the policy interest rate unchanged, what will happen to the IS, LM and UIP curves, respectively? What will happen to domestic output (Y), the exchange rate (E). Explain in words.