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a) Assume the exchange rate is allowed to fluctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what e ect an increase in government spending will have on the domestic economy. In your graphs, clearly label all curves and equilibria. What are the changes of output, investment and trade balance.

b) Assume the exchange rate is allowed to uctuate freely. Using the IS-LM-IP model, graphically illustrate and explain what e ect a monetary contraction will have on the domestic economy. In your graphs, clearly label all curves and equilibria.What are the changes of output, investment and trade balance.?

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