For each of the following scenarios, assume the economy experiences an exogenous decrease in investment demand. For each case, illustrate the IS-LM-FX diagram and state and explain briefly the effect of the shock (increase, decrease, no change, or ambiguous) on the following variables: Y, i, E, C, I, TB.

Here, we assume the policy makers objective is to keep output fixed at its initial value.

a. Monetary policy response under a floating exchange rate regime.

b. Fiscal policy response under a floating exchange rate regime.