Could you please help clarify how to illustrate the world recession in part c with the IS LM BP model? And how is the expected exchange rate relevant here?

C3. Consider a small open economy with imperfect capital mobility, exible exchange rage and xed prices and wages. Goods-market equilibrium is where output Y is equal to the sum of consumption C, investment 1, government spending G, and net exports NX. The consumption and investment functions are: C = 60+ c1(YT), I = lo- br, where r is the domestic nominal interest rate. Net exports are given by: NX = NXD(Y*) zY (15', where Y" is the world's output and E is the nominal exchange rate. 5 Money-market equilibrium is represented by the equation: M? = M0 + W hr, where M5 is the money supply, P is the price level, and the right-hand side of the equation is the demand for money. The foreign exchange market equilibrium is determined by the balance-ofpayments condition NX + CF = 0, where CF is the capital flow determined by the following equation: EeE CF=cf-(rr*+ E ) where is, cf is the capital mobility parameter, and E9 is the expected exchange rate. Assume, that the foreign interest rate r* = 0 since the world economy has entered a liquidity trap. (a) [20 marks] Derive algebraically the condition for the BP curve to be atter than the LM curve. Explain intuitively this result in two-three sentences. Illustrate graphically using only the lS-Ll'vl- BP diagram how the internal and external equilibria of the economy are determined. (b) [20 marks] What is the initial equilibrium level of domestic investment when private saving is equal to budget deficit? Will an inflow of foreign nancial capital result in higher domestic investment, if national saving remains unchanged? (c) [20 marks] Suppose now, that the world economy plunges into a demand-driven recession. What will be the immediate effect on domestic investment after the external shock and how will the equilibrium be restored? Illustrate your answer using the lS-LM-BP diagram and explain the adjustment process in three-four sentences. (d) [20 marks] How would the equilibrium level of domestic investment change had the recession abroad been temporary, is. leaving the expected exchange rate E9 intact? illustrate your answer using either the lS-LM-BP or the BPIS-LM diagram and explain the adjustment process in three-four sentences