a) Discuss the role that fiscal dominance plays in the first generation crisis model regarding fixed exchange rates.

Use the figure below to answer the following questions:

SIMPLIFIED CENTRAL BANK BALANCE SHEET (MILLIONS OF PESOS) Assets Liabilities Reserves R 500 Money supply M 1,000 Foreign assets (dollar reserves) Currency in circulation Domestic credit B 500 Domestic assets (peso bonds)MS - - L ( yB ) L(YA ) 1000 1200 MCentral Bank Balance Sheet Domestic 1,600 credit, B 1,500 1,400 1,300 Floating line M = B 1,200 1,100 N 1,000 900 800 700 600 B1 = 500 } 500 2 400 300 200 100 Fixed line M. 0 6 0 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 M, = 1,000 Money supply, M