A CLOSER LOOK AT AGGREGATE DEMAND
Consider the specification of the aggregate demand relation in an open economy with fixed exchange rates given in the text:
$$
\begin{aligned}
Y= & C(Y-T)+I\left(Y, i^*\right)+G \\
& +N X\left(Y, Y^*, \frac{\overline{E P^*}}{P}\right)
\end{aligned}
$$
a. Discuss the effects on output, given the domestic price level, of an increase in the foreign price level.
b. Discuss the effects on output, given the domestic price level, of an increase in expected domestic inflation.
c. Discuss the effects on output of an increase in foreign interest rates. If the country wishes to keep its exchange rate fixed, how can it keep output constant?