1. Use our benchmark Mundell-Fleming model to compare the effects of the following shocks under fixed and flexible exchange rates: (a) A drop in export demand (for a given value of e) (b) A rise the price level (c) A drop in the level of the international interest rate r*. 2. Risk premium Consider the case of a small open economy with a fixed exchange rate. Suppose that the country is hit by a severe (idiosyncratic ) shock that reduces domestic demand . a. Illustrate the effects of the demand shock assuming that the Central Bank sticks to its commitment to the fixed exchange rate. b. Suppose that the shock provokes a drastic rise in the budget deficit of the government. Explain what happens if financial markets fear that the government may default on its debt with some probability 0