Consider a home country that adopts a fixed exchange rate regime and the domestic currency (peso) is pegged to USD at 1 bar peso per USD. Starting from equilibrium, suppose the central bank resets the fixed rate from 1 bar to 2 bar, where 2 > 1. This is called a devaluation policy,

i.e. the exchange rate regime remains a fixed rate system but the fixed rate itself is reset to a more depreciated level.

Apply the Mundell Flemming model to analyse the effect of this devaluation policy on the home country's real output, nominal interest rate, money supply, foreign exchange reserves, and trade balance.

We assume that the fixed exchange rate regime is credible, i.e. e=1 bar before the devaluation and e = 2 bar after the devaluation. In other words, the market believes the devaluation is a one-time event and not expected to be repeated. Support your answer with IS-LM-FX diagrams, explain why some curves will shift and how the home country moves from the initial equilibrium to the new equilibrium.