1. Assume we are in a world consisting of two countries: A small, open economy named "Home" and the Rest of the World (RoW). The exchange rate between them is fully flexible. Assume that the government is using monetary policy to stabilize output. For each case,illustrate(using the IS-LM-FX model) andexplain why and howthe following variables are affected by the shock and the policy response:Y,i,E,C,I, andTB.

Hint: In each case, make use of the goods market equilibrium condition to understand what happens toC,I, andTBin the shift from the old to the new equilibrium.

1. i. RoW output increases.
2. ii. Investors expect an appreciation of the home currency in the future.
3. iii. The home money supply decreases.
4. iv. Government spending at home decreases.