IS-LM-BP model i = The IS equation is given as: Y = (–) (A – (a+b)i), while the LM equation is given

IS-LM-BP model i = The IS equation is given as: Y = (–) (A – (a+b)i), while the LM equation is given as: (1) (kY – M), in which Y is output (or income), į is the interest rate, Ā is the autonomous expenditure, a and b are constants showing the responsiveness of consumption and investments to interest rate changes, c is the marginal propensity to consume, h shows the responsiveness of money demand to interest rate changes, k models the transactions demand for money, and M is the money supply. In addition, you have the following information for Country A, a small open economy with a flexible exchange rate: c=0.8 (a+b) = 2,000 h= 2,000 Ā= 1,000 M = 400 k= 0.1 a) Find two points on Country A's IS-curve using į= 0 and i = 0.1, and two points on the LM curve using Y= 4,000 and Y = 6,000. Use the points to illustrate the two curves graphically in the same figure (IS/LM-diagram) with į on the vertical axis and Y on the horizontal axis. Write out the known values for both į and Y. (4p) b) Show the levels of į and Y that correspond to the internal equilibrium in your figure. Denote them as į* and Y*. (1p) c) Assume perfect capital mobility and a world/foreign interest rate of 5 percent. Draw the corresponding BP-curve in your figure. Considering all three curves, IS-LM-BP, what does this situation imply for the balance of payments of Country A? (2p) d) Describe in words the process for how Country A moves from the internal equilibrium (Y*,j*) to a short-run joint equilibrium, without any policy intervention. (4p)