IS-LM-BP model 1. Consider a small open economy with xed wages and prices, and assume perfect capital mobility. Illustrate the equilibrium of this economy on a diagram. Assume that the economy follows a exible exchange-rate regime. a. Suppose that households in the economy decrease the amount they want to save. Describe the e'ects on output, the current account and the exchange rate. 13. Suppose that the price levels prevailing in the economy's trading partners decreases. Describe the effects on output, the current account, the nominal exchange rate and the real exchange rate. (Lint: don't bring in ination and Fisher relation since this is short-run economic analysis.) c. How would your answers in (b) change if Home imports are more sensitive to income? (IE: find out what happens to the shape of the IS curve rst.)