In answering this question, utilise the open economy IS-LM-UIP model and diagrams developed in the ECON 202 Course. Also, assume the domestic price level, P, inflationary expectations, He and the expected nominal exchange rate, Ee, are fixed in the short run; also assume that the Marshall-Lerner conditions hold.

Show diagrammatically and explain the impact, in the short run, that a significant fall in international interest rates, i*, would have on the domestic interest rate, i, on the nominal exchange rate, E, on real GDP, Y, and on real private consumer expenditure, C (which is dependent on movements in both household disposable income and i), for an open economy that is operating:

(a) A floating exchange rate regime

(b) A fixed exchange rate regime

(c) Now, suppose this small open economy has a fixed exchange rate, and its real GDP is above its natural level of output, Yn, both before and after the fall in international interest rates. ExplainQ and show diagrammatically, with the additional assistance of AD-AS (or IS-LM-PC) diagrams, how the economy might get to its natural output level, with and without a revaluation of its nominal exchange rate.

Can you help me with the diagrams?