Question 3 (15 marks) Consider an open economy with flexible exchange rates. Let IS stand for the product market equilibrium condition, LM for the financial market equilibrium condition, and IP for the interest parity condition. a. Write down the equations for the IS, LM and IP curves and explain what the 3 curves in the IS-LM-IP diagram represent and why they each have their particular slopes. (6 points) b. Fast rising inflation concerns central bank around the world. Assuming RBA decides to raise cash rate to fight domestic inflation in December 2022 and assuming other central banks around the world do not change their interest rate. In an IS-LM-IP diagram, show the effect of this monetary policy on Australian output, the interest rate and the exchange rate. ( 6 points) c. Which components of aggregate demand change? Explain in words. (3 points) Question 3 (15 marks) Consider an open economy with flexible exchange rates. Let IS stand for the product market equilibrium condition, LM for the financial market equilibrium condition, and IP for the interest parity condition. a. Write down the equations for the IS, LM and IP curves and explain what the 3 curves in the IS-LM-IP diagram represent and why they each have their particular slopes. (6 points) b. Fast rising inflation concerns central bank around the world. Assuming RBA decides to raise cash rate to fight domestic inflation in December 2022 and assuming other central banks around the world do not change their interest rate. In an IS-LM-IP diagram, show the effect of this monetary policy on Australian output, the interest rate and the exchange rate. ( 6 points) c. Which components of aggregate demand change? Explain in words. (3 points)