Suppose that a small open economy starts at a long-run equilibrium. Now assume that a new president gets elected to office and he brings to the government the best 5 economists of the country. At the same time the economy started to grow at a rate above average and is projected to continue growing at such a rate for the next 5 years. All these events cause the risk premium of this country to go down.
Use the Mundell-Fleming model to illustrate graphically the impact of this more favorable risk premium in the short run. Be sure to start from the Keynesian Cross and the Market for Money your analysis, and to label the axes, the curves, the initial equilibrium values, the direction the curve shift and when they do shift, and the short-run equilibrium values. State in words what happens to the nominal exchange rate and output in the short run.