2. The IS - LM -UIP Model Consider an economy that experiences an increase in consumer confidence. Let UIP stand for the uncovered interest parity condition. a. Suppose the economy has a flexible...

answer for part D

Extracted text: 2. The IS - LM -UIP Model Consider an economy that experiences an increase in consumer confidence. Let UIP stand for the uncovered interest parity condition. a. Suppose the economy has a flexible exchange rate. In an IS – LM – UIP diagram, show the effect of the increase in consumer confidence on output, the interest rate, and the exchange rate. ( You must draw the graphs) b. (Following (a)) How does the change in the exchange rate, by itself, tend to affect output? Does the change in the exchange rate dampen (make smaller) or amplify (make larger) the effect of the increase in confidence on output? Suppose instead the economy has a fixed exchange rate. In an Is – LM - UIP diagram, show effect of the increase in consumer confidence on output, the interest rate. What must happen to the money supply in order to maintain the fixed exchange rate? ( You must draw the graphs) d. How does the effect on output in this economy, with fixed exchange rates, compared to the effect you found for the economy for part (a), with flexible exchange rates?