Suppose that a central bank (CB) aims inflation targeting for price stability with Aπ = 0) under the flexible exchange rate regime. Further assume that there is trade and budget balance (NX = 0 and T = G), output is at its natural level (Y= Yn), domestic interest rate equals foreign interest rate (i = i*), real interest and exchange rates equal their nominal values (r = i, & = E). If the foreign interest rate i* increases how would change the exchange rate E, output Y, interest rate i, net export NX and budget B? Use IS-LM-UIP-PC model (15). IS: Y = C(Y− T) + I(Y, i) + G + NX (Y,Y*, E) E LM:i=ī 1+i 1 + i* -Ee