Consider an open economy with flexible exchange rates. Flexible exchange rates and foreign macroeconomic policy. Let UIP stand for the uncovered interest parity condition In an IS-LM-UIP diagram.
1. Demonstrate the effect of an increase in foreign output, Y*, on domestic output, Y. Explain in words.
2. Demonstrate the effect of an increase in the foreign interest rate, i*, on domestic output, Y in an IS-LM-UIP diagram. Explain in words.