In this exercise, we will cover the short-run equilibrium of an open economy represented by an AA-DD diagram. (a) (2 points) Plot an AA-DD diagram and label the initial equilibrium as 1. Suddenly, consumers in global markets change their preferences. Now, they prefer foreign products over domestic ones. Shift the relevant curve [explaining why it is shifting] and label the new equilibrium as 2. What happens in the short-run with the output and the nominal exchange rate? Explain. In the new equilibrium, are factors in the economy underemployed or over-employed? (b) First, duplicate the previous plot (with points 1 and 2). i. (1 point) Now, imagine the policymakers are discussing whether to use a temporary fiscal policy intervention to counteract this shock. Should they increase or reduce the government expenditure? Explain ii. (1 point) Now, imagine the policymakers planning to change the money supply. Should they increase or decrease the money supply? Explain iii. (1 point) Between these two policies, which is more convenient? Explain (c) (3 points) At the end of the day, policymakers decided to do a fiscal policy. However, they have started thinking that the change in preferences will be a permanent shock, and they are discussing whether they should change the temporary fiscal policy to a permanent one. What is your opinion about this idea? Use a graphical analysis and an economic analysis to support your recommendation