Suppose that a new technological innovation comes on line in a small domestic country.

(i) What are the equilibrium effects on aggregate output, consumption, investment, real wage, the real interest rate, the nominal interest rate and price level if the country is not participating in international markets?

(ii) Now consider an open economy, suppose the exchange rate is flexible. What are the equilibrium effects on the price level and exchange rate?

(iii) Suppose that the exchange rate is flexible and the domestic government's goal is to stabilize the price level. Determine how the domestic money supply changes and the effect on the nominal exchange rate.

(iv) Suppose that the exchange rate is fixed. How does your answer differ from parts (ii) and (iii)?