dse-2012 macroeconomics question--Could not able to analyse

[Amrith]

hi guys , question is bit long but i am helpless. i just got stuck over analysing this question. please help me out
in understanding this question analytically as well as algebraically
Consider a small open economy with fixed nominal exchange rate (E), fixed domestic price level (P) and fixed foreign price level (Pf). Let "e" be the corresponding real exchange rate. The goods market equilibrium condition is given by the following IS equation:
Y = C + I + G + X - IM/e
where
C = c0 + c1Y represents domestic consumption
I = d1Y  -d2r represents domestic investment
G represents government expenditure
X = x1Yf-x2e represents export
Yf represents income of the foreign country
IM = m1Y + m2e represents import

QUESTION 57. Suppose the rate of interest (r) as exogenously given. Then a unit increase in the foreign price level, ceteris paribus, increases domestic output by

[Vishruti]

Analytically, the questions is looking at change in domestic output due to a unit change in P* (foreign price level). This is given by dY/dP*. We use the fact that real exchange rate = nominal exchange rate * domestic price level/foreign price level; epsilon = EP/P*

Now, the equilibrium is calculated using the equation Y = C + I + G + X - IM/epsilon

This will give us equilibrium level of domestic output. Now substitute the expression for real exchange rate and differentiate w.r.t P*

We get the answer as option (c)

[Amrith]

Thanks a lot....vishruthi. i have 3 more follow up questions to the same main question. please try to help me in resolving this mystery..........