Assume we are in a world consisting of two countries: A small, open economy named "Home" and the Rest of the World (RoW). Assume the government responds to shocks using monetary policy. The primary goal is to maintain a FIXED exchange rate, RATHER THAN to stabilize output.

(a) Illustrate using the IS-LM-FX model and explain why and how the following variables are affected by the shock and the policy response: Y, i, E, C, I and TB.

i. RoW output increases

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

iii. The home money supply decreases

Thank you!