For this fixed exchange rate question you will continue to use the above model, reproduced here: MYP =5+ 0.6Y 1007" Real Money Demand C? =30+ 0.5(Y = T) - 200r" Desired consumption 14 = 40 - 200* Desired investment NX?=31-0.1Y 5 Desired Net Exports As well, you can assume that =150 is the long-run equilibrium level of output. A) Suppose that the government decides to peg the nominal exchange (enom) at 0.60, which is below its equilibrium value. Calculate the short-run as well as the long-run eftects on the economy. In particular, what would happen to the real exchange rate in each period (that is, the short run and then the long run). B) As economists in the Department of Finance, you advise the government that in the long run, the policy of pegging the exchange rate will not have a lasting effect on Y. That said, because it is below its equilibrium value, the short-run increase in demand does provide an opportunity to lower the fiscal deficit while keeping the economy at full employment. 1. Use inturn a cut in G and then an increase in T to keep the economy at full employment (that is, cut & and then separately raise T, in each case by enough to offset the expansionary effect of the devaluation). 2. Which policy results in the most improvement in the budget deficit? Describe the effects of each policy on components of Y. 3. Do the policies have different effects on the composition of demand (e.g., net exports and consumption)? C) Start again with the conditions as they were in Part a). Assume that the economy experiences an increase in potential from =150 to =153. Use the model to find the long-run effect of this change on the real exchange rate (), net exports (NX) and consumption (C). As well, find the new level of the nominal money supply (M) needed to maintain long-run equilibrium. Did the nominal money supply rise or fall? What has happened to the real money supply? D) Assume again that the economy is back to its initial situation as described in Part a) above. MNow suppose that the world interest rate falls from 5% to 4%. How will this affect the economy in the short and long run? In the economy''s new long-run equilibrium, what has happened to net exports, consumption and investment? Find as well the new price level. Has the reduction in the world interest rate been inflationary or disinflationary for the economy