Countries A and B are small open economies. Their economies depend on each other heavily for trade, but their respective governments don't always work together when setting economic policy.

Country A decides to decrease domestic taxes to balance its budget.

i) How does Country A's policy, assuming a floating exchange rate, impact trade between the two countries? Explain your answer with graph and two sentences.

ii) Let's assume now that Country B pegs their currency (fixed exchange rate) to Country A's currency. What action does Country B's central bank take in response to Country A's actions to control short run output? How does country B's new policy impact trade relative before Country A changed their tax policy? Explain with a graph and two sentences.

iii) Suppose Country's A central bank contracted money supply to combat inflation simultaneously with their new tax policy (explained before part i)). With this new information. Would your answer in part (ii) change for country B's optimal central bank policy to fix their exchange rate?

Explain all answers and carefully draw labeled graphs (except part (iii))