Consider two economies, Home and Foreign. Home pegs its currency, DC, to the currency of Foreign, FC. The government of Foreign increases import duty on Home's lumber from 8.99% to 17.9%.

a) If the market expects this change in trade policy is long lasting, what happens to domestic output and current account in the short run? In the long run? Explain and support your answer by ONE DD-AA diagram. (12 points)

b) Would you change your answer in part (a) if the market expects the change is short-lived? Yes/No, why and how? Explain and use the diagram in part (a) to support your answer. No credit will be given if you draw a new diagram. (8 points)

Note: Compare your answer to the initial equilibrium.