Consider the IS-LM-BP model of an open economy with a constant price level, perfect asset substitutability, and perfect capital mobility. The economy is initially in both internal and external...

Consider the IS-LM-BP model of an open economy with a constant price level, perfect asset substitutability, and perfect capital mobility. The economy is initially in both internal and external equilibrium.

a. Explain why the BP curve is a horizontal line at i 5 iF, where i is the domestic nominal interest rate and iF is the foreign nominal interest rate.

b. Define the internal equilibrium and external equilibrium of the economy, respectively.