Suppose political stability in the US as seen from abroad deteriorates and US assets become less attractive to foreign investors. Assume that the US is a large open economy and that neither Congress nor the Federal Reserve Board takes action to counter the speculative capital outflow.
(1) Using the Mundell-Fleming model for a large open economy, state and show graphically what would happen in the short run to each of the following:
A) the US net capital outflow curve
B) the IS and LM curves
C) the domestic real interest rates
D) the real exchange rate of the US dollar
E) the level of US net capital outflow and net exports
F) US real GDP

(2) Explain what would happen in the short run to US real interest rates and real GDP if the Fed takes action to counter the speculative capital outflow and support the US dollar. How would these events impact the global economy?