1. Assume the government again responds to shocks using monetary "policy". However, this time the primary goal is to maintain afixedexchange rate (rather than to stabilize output).

(a)Illustrate(using the IS-LM-FX model) andexplain why and howthe following vari- ables are affected by the shock and the policy response:Y,i,E,C,I, andTB.

i. RoW output increases.

ii. Investors expect an appreciation of the home currency in the future.

iii. The home money supply decreases.

iv. Government spending at home decreases.

(b) In which case(s) will the government response be the same as in1.i. to1.iv.? Explain briefly.