Explain how a floating exchange rate regime acts as a buffer and softens the blow in the face of a negative external shock. (Hint: Use the IS-LM-BP model, assuming perfect capital mobility; do a flow chart to illustrate.)

KEY: In the case of a negative external shock, e.g., drop in net exports (NX), the adjustment will be as follows:

NX drops IS shifts left GDP and interest rate drop, complete the flow chart