Imagine that you run a central bank in a floating exchange rate regime. Your current goal is to stabilize real GDP by keeping it constant, and you control the money supply to do so. Using the open economy IS/LM model, what happens to the money supply, the interest rate, the exchange rate, and the trade balance (net exports) in response to each of the following shocks (illustrate the changes in the 3-pane diagram and then summarize your findings):

(a) The president of your country raises taxes to reduce the budget deficit.

(b) The president of your country restricts the import of foreign cars..

Please illustrate the effects on a 3 panel diagram of the open economy IS/LM model, either handwritten or digitally drawn. I have attached the template diagram below along with example diagrams using it. Thank you sooo much

\fMonetary Stimulus in the Open Economy Model Suppose the Fed wants to stimulate the economy and increases the money supply . . . I. IS r /LM \\ C> Y :> CF e @\\ => NX 0 LM shifts down/right, increasing Y and decreasing r 0 Lower interest rates increase net capital outflows O The currency depreciates and net exports increase 0 The increase in Y is bigger than in the closedeconomy due to the trade stimulus Trade Barriers r IS r \\/LM \\ eL 0 Suppose your export demand collapses due to sanctions or a decline in tourism 0 NX shifts left (lower exports for any exchange rate) 0 Depreciating exchange rate also lowers imports. so NX is ultimately unchanged 0 Net effect: exchange rate depreciates, exports and imports fall (so net exports = exports minus imports doesn't change much) Decrease in Foreign Interest Rates r .s r X \\ l} If y CF {3 For any domestic interest rate r net inflows increase (CF shifts left) > Demand for domestic currency from abroad appreciates the exchange rate and net exports decrease > Since Y = C(Y) + I(r) + G+ CF(r), IS also shifts left a little * Flows from abroad decrease domestic r * Declining exports hurt domestic demand * But this secondary effect is small in practice 0 This mechanism caused concern in emerging markets in the early 20105 when the US adopted very loose monetary policy