uppose a small open economy has the following money demand function: M/P = L (r, Y-T), where r is the interest rate and (Y-T) is the disposable income. Please illustrate graphically the short-run impact of a tax cut on the exchange rate and level of output in the small open economy under both fixed and floating exchange rate systems. Be sure to label: i. the axes, ii. the curves, iii. the initial equilibrium levels, iv. the direction the curves shift, and v. the new short-run equilibrium.

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