Q2. MnndeIl-Fleming model. {in marks} Consider an open economy lS-LM model. China's currency is the \"Chinese Yuan Renminhi {CNY}" and the USs currency is the \"US dollar (USDT'. China has a fixed exchange rate regime with respect to USE. The central bank of China maintains a peg of 1 CNY=D. 14 USE. The interest rate in the USA is 1.5%. a. What do the above facts imply about the interest rate in China? Explain. {2 points) h. Suppose that the USA experiences an increase in output 1". With the help of a diagram explain the short-mn effects of the increase in Y' on the economy of China. What happens to output and net experts? Carefully lahel your diagram. {2 points] c. Suppose the USA Federal Reserve Bank conducts an expansionary monetary policy and lowers its interest rate to 2%. How will the oentral hank of |China react if it wants to maintain the exchange rate peg? What will he the effect of this on the interest rate in China? (2 points) d. Following part {c}, with the help of a diagram explain the short-um effects of the foreign expansionary monetary policy on the economy ofChina. What happens to output and net exports? (2 points] e. Suppose instead that l{China decides to abandon the fixed exchange rate regime and to adopt a exible exchange rate regime. With the help of a diagram explain how your answers in part {b} would change? What would happen to output, net exports, and nominal exchange rate? (2 points}