(5 points) A financial crisis is a form of a large, negative, temporary but persistent demand shock in the money market such that money demand...

(5 points) A financial crisis is a form of a large, negative, temporary but persistent demand shock in the money market such that money demand increases for a given level of money supply. Assume a flexible exchange rate regime.
Use the IS-LM-FX model to illustrate the short-run effects of a financial crisis on output, nominal interest rate, exchange rate and investment.
Suppose the goal of macro policy is to stabilize output in the short run. What kind of fiscal policy would you recommend to the government?
Can we replace the fiscal policy in Part (b) with monetary policy? If you answer yes, explain what kind of monetary policy is desirable. If you answer no, explain why.
Suppose that the central bank switches to a fixed exchange rate regime before the financial crisis. How will your answer in Part (c) change?
Is it possible that this economy remains stuck in liquidity traps despite efforts to stabilize output? Explain your reasoning.