Emerging out of the recent global recession, the ongoing discussion across countries revolves around fiscal austerity in order to reduce budget deficits and government debts. Using the Mundell-Fleming model, assume the goods market, exchange rate market and the money market are in equilibrium when aggregate output is Y1, exchange rate is E, and interest rate is r . If Jewel Island, a small open economy with perfect capital mobility and flexible exchange rate, implemented contractionary fiscal policy: a. Explain the effect on the goods market. [10 marks] b. Explain the effect on the money and exchange rate market. [10 marks] c. Explain the feedback effect on the goods market. [5 marks] d. Use Mundell-Fleming model illustrate/discuss how the equilibrium in the model changes for a fixed exchange rate economy. [15 marks]