Assume that investors at Home are myopic. The government is running a large fiscal deficit, causing an expansion in domestic credit to finance it. At some point in time, the central bank abandons the peg. The country experiences a significant increase in inflation after the central bank abandons the peg. Explain the reason of the rise in inflation. Use time graphs and explain your answer. b) (5 points). Now assume that investors are forward-looking. Before abandoning the peg, forward-looking investors hear the news that the government deficit will grow continuously each year. How will investors respond to the announcement of the budget deficit? What happens to reserves as a result