II. Currency Crises 4. (14 points) Consider a small open economy with a fixed exchange rate and, initially, Y=Yn. There is no risk premium a. Despite the stated fixed exchange rate, suppose that the expected exchange rate (in financial markets) falls, so it is now lower than the stated fixed exchange rate. Show the effect in an IS-LM-UIP diagram (use the modern approach to monetary policy, with interest-rate targeting). If the central bank remains committed to the fixed rate, what happens to the home interest rate and home output? b. No diagrams for this part. Answer in words. Under the circumstances in part (a), what policy might the central bank be tempted to use to restore the economy to Y=Yn ? If this policy were successful, how would output change in the direction desired by the central bank