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Question 14 10 pts A 10-mark Question about the Mundell-Fleming Model Throughout this question, assume that domestic and foreign ination and expected ination are zero and that the real exchange rate equals the nominal exchange rate. Assuming, to begin with, that the exchange rate is exible, use an open economy IS-LM model to explain: Question parts (type your answers in the box provided using the labels (a), (b), (C). (d). (6). (f). (a) (3 marks) The effects of contractionary domestic monetary policy in the form of an increase in the domestic interest rate i on 1) domestic output. 2) domestic interest rates, 3) exchange rate and 4) net exports. (b) (2 marks) The effects of expansionary domestic scal policy, in the form of an increase in domestic government spending G (assuming no response by the domestic central bank) on 1) domestic output. 2) domestic interest rates, 3) exchange rate and 4) net exports. (c) (2 marks) The effects of contractionary foreign scal policy, in the form of a decrease in foreign government spending (3* (again assuming no response by the domestic central bank) on 1) domestic output. 2) domestic interest rates, 3) exchange rate and 4) net exports. Now suppose the exchange rate is xed, not exible and suppose the domestic output is below its natural level. (d) (1 mark) Is it possible to engage in expansionary domestic monetary policy to increase output? Explain. (e) (1 mark) Should the government engage in a one-time devaluation to increase output? What are the effects on 1) domestic output. 2) domestic interest rates, and 3) net exports following a devaluation. (f) (1 mark) What will happen to the real exchange rate in the long-run if the government does nothing