Problem 2 (25 points total). This question should be answered within the context of the IS-LM-FX model developed in class. Assume there are two economies: domestic and foreign. Throughout this question, assume that the exchange rate is floating in both economies. Part 2.a (15 points). For the domestic economy draw the IS-LM-FX model in an arbitrary initial equilibrium. In that same graph, show the position of all curves after all adjustments take place given the following series of events: (i) there is a temporary and unexpected exogenous decrease in domestic investment demand and (ii) domestic monetary policy is implemented in a way that successfully stabilizes output. By "showing the position of all curves" after these events, what you are doing here is arriving at a graphical represen- tation of the new domestic short-run equilibrium. Also, draw the IS-LM-FX model for the foreign economy in an arbitrary initial equilibrium, and show the position of all domestic curves after the events described in (i) and (ii) that take place in the domestic economy. Here, you are arriving at a graphical representation of the new short-run equilibrium in the foreign economy. Please explain in careful detail the "whys" behind what you are showing in your graphs, and make sure to carefully label your graphs' ares. Part 2.b (10 points). Following the events in part (a), in the short run, compared to the initial equilibrium, fill in the table below with a "1," "J," or "-" to indicate whether the value of the following variables are higher (1), lower (1), or the same (-) in the domestic 4 economy and the foreign economy: output, consumption, investment, the interest rate, the nominal exchange rate, and the trade balance. Also, please explain in careful detail the "whys" of the changes you are showing in your table. Domestic Foreign Output Consumption Investment Interest rate Exchange rate Trade balance