Assume in an economy the price level is 1 and IS and LM curves are the following. Y = 22 1.5T 30f + 26' (assume this is the desired JH employment level ofomput) M = 1"(1 i) The home central bank uses the interest rate as its policy instrument. Initially, the home interest rate equals the foreign interest rate of 10% or 0.1. Taxes and government spending both equal 2. Assume that forex market equilibrium is given by 1' : ([UE] - 1) + 0.10, where the two foreign return terms on the right are expected depreciation and the foreign interest rate. The expected future exchange rate is 1. A. What is the level of output, today's spot exchange rate, and the level of home money supply? (1 point) B. There is now a foreign demand shock, such that the IS curve shifts left by 1.5 units at all levels of the interest rate. What is the new IS curve? The government asks the central bank to stabilize the economy at lll employment. To stabilize and return output back to the desired level, according to this new IS curve, by how much must the interest rate be lowered from its initial level of 0. 1? (1 point) C. At the new interest rate and at ll] employment, on the new LM curve, what is the new level of the money supply and according to the forex market equilibrium, what is the new level of the spot exchange rate? How large is the depreciation of the home currency? (1 point) D. Return to part (B). Now assume that the central bank refuses to change the interest rate from 10%. In this case, what is the new level of output? What is the money supply? And if the government decides instead to use fiscal policy to stabilize output, then according to the new IS curve, by how much must government spending be increased to achieve this goal? (2 points)