Consider the following situations using the Mundell-Fleming model. Assume the economy starts off in long-run equilibrium. Please answer the questions using graphical illustrations in both (Y, E) and (Y, r) space.

a. Analyze the impact of a decline in domestic investment tax credit in a standard small open economy on the nominal exchange rate E, income Y, and money supply M under both floating and fixed exchange rates.

b. Suppose now that the small open economy is in a liquidity trap situation with domestic interest rate equal to the world interest rate r* = 0. Analyze the impact of the same decline in domestic investment tax credit on the nominal exchange rate E, income Y, and money supply M under both floating and fixed exchange rates.