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Question 5 (20 marks) Assume that initially an economy is running a trade deficit and its equilibrium output is above the natural level of output Yn. Suppose that the government would like to reduce the equilibrium output to the natural level and at the same time remove the trade deficit to achieve a trade balance. Also assume that the Marshall-Lerner condition holds in this economy. Suppose that the natural level of output corresponds to a trade deficit in the initial net export curve. Draw graphs for the initial equilibrium in the goods market (22 curve) and the corresponding net export curve. Indicate the initial equilibrium output by Y0 and the initial equilibrium net export by NXO . On the same diagram in part (a), indicate the position of the natural level of output in your graphs by \"Yn\". Please propose a policy mix in terms of government spending and the real exchange rate to achieve the goal set by the government. Illustrate the policy mix in your graphs. Suppose that the economy is under a exible exchange rate regime and that the domestic and foreign price levels are both xed and set to 1. The expected nominal exchange rate E 3 does not change and the foreign interest rate is xed at i*. C. What kind of monetary policy is needed to achieve the change of the real exchange rate that you proposed in part (b)? Illustrate your proposed monetary policy together with the fiscal policy derived in part (b) using an IS-LM-UIP diagram (i.e. Mundell-Fleming model) such that output will go to the natural level of output. How would the equilibrium consumption, investment change after the proposed changes in the fiscal and monetary policy are implemented