Question 13 The Hong Kong dollar is pegged to the US dollar and investors believe it will stay pegged at the current exchange rate. Moreover, there is perfect capital mobility between the two countries. (a) Is it possible for the interest rate in Hong Kong to exceed the interest rate in the United States? Explain why, or why not. [5 marks] (b) The US interest rate is 3%. Sketch the IS-LM-BP diagram for Hong Kong assuming internal and external balance. Explain briefly what these terms mean. [5 marks] (c) Due to the coronavirus pandemic government expenditure in Hong Kong has risen sharply. Use your diagram to analyse the effects of this, explaining carefully the adjustments that must occur to restore internal and external balance. [8 marks] (d) The US interest rate falls to 2%. Analyse the effects for Hong Kong if (i) the Hong Kong dollar continues to be pegged against the US Dollar, and (ii) if the Hong Kong dollar were allowed to float. In which of the two cases is output higher? [12 marks]