Flexible exchange rates and responses to changes in foreign macroeconomic policy. suppose there is an expansionary fiscal policy in the foreign country that increases y*, and at the same time the foreign central bank raises i* .
(a) in an is-lm-ip diagram (ip for the interest parity relation), show the effects of the increase in foreign output y* and the increase in the foreign interest rate i* , on domestic domestic output y and the exchange rate (e), when the domestic central bank leaves the policy interest rate unchanged. briefly explain in words.
(b) in an is-lm-ip diagram, show the effects of the increase in y* and the increase in i* on the domestic output (y ) and the exchange rate (e), when the domestic central bank matches the increase in the foreign interest rate with an equal increase in the do-mestic interest rate. briefly explain in words
(c) in an is-lm-ip diagram, show the required domestic monetary policy following the increase in y* and the increase in i* , if the goal of domestic monetary policy is to leave domestic output y unchanged. briefly explain in words. when might such a policy be necessary?