A Small Open Economy with a Floating Exchange Rate Is $I S _ { 1 } ^ { * }$

Multiple Choice

A small open economy with a floating exchange rate is initially in equilibrium at A with $I S _ { 1 } ^ { * }$ $L M _ { 1 } ^ { * } .$ If the establishment of a new government in the country decreases the risk premium, then $L M _ { 1 } ^ { * }$ will shift to _____ and $I S _ { 1 } ^ { * }$ will shift to _____.

A) $L M _ { 2 } ^ { * } , I S _ { 2 } ^ { * }$
B) $L M _ { 2 } ^ { * } , I S _ { 3 } ^ { * }$
C) $L M _ { 3 } ^ { * } , I S _ { 2 } ^ { * }$
D) $L M _ { 3 } ^ { * } , I S _ { 3 } ^ { * }$