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please do not copy and paste from another source. The last time I asked this question that happened and the response was wrong. I will

please do not copy and paste from another source. The last time I asked this question that happened and the response was wrong. I will upvote plz helpimage text in transcribed

Consider the economy of Orange Republic which is characterized by the following IS-LM-UIP model IS relation: Y = C(Y-T) + I(Y, i) + G + NX (Y, Y*, E) where E denotes the current exchange rate LM relation: i = i +1 1+i* UIP condition: E = 1 Ee where Ee denotes the expected exchange rate which is assumed to be fixed. (Note: You should learn to draw the diagram by yourself.) a. In an IS-LM-UIP diagram, show the effect of an increase in foreign output, Y*, on domestic output, Y, of Orange Rep and the exchange rate E when the central bank of Orange Rep leaves the policy interest rate unchanged. Answer: The Select ] curve shifts [Select] because net exports tend to [ Select] as foreign V output rises. Domestic output (Select] If the central bank leaves the interest rate unchanged, the Select] curve [ Select . The exchange rate will [Select] b. In an IS-LM-UIP diagram, show the effect of an increase in foreign interest rate, i*, on domestic output, Y, of Orange Rep and the exchange rate E when the central bank of Orange Rep leave the policy interest rate unchanged. Answer: When the foreign interest rate rises, at the same domestic rate of interest, the domestic interest rate is relatively lower. The [ Select] . The domestic currency depreciates. The depreciation of domestic currency increases net V curve will [Select] exports. The IS curve will shift [Select ] . So, domestic output [Select] when the foreign country tightens its monetary policy. c. (continued from b) What if the central bank of Orange Rep responses to the increase in the foreign interest rate, i*, in order to keep domestic output, Y, unchanged, which type of monetary policy should be implemented? Show the effect on the exchange rate. When might such a policy be necessary? curve Answer: In order to keep domestic output, Y, unchanged following the increase in the foreign interest rate, the central bank of Orange Rep should implement [Select] monetary policy. The domestic interest rate will [Select] , shifting the [Select ] [Select] until it cuts the new IS curve at the original output level. This policy is necessary when the economy is [ Select]

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