Question 4: Gold Holdings and Price Level Determination in the Interwar Gold Standard (25 Points) Consider the following model of the world economy: There are two countries, Home and Foreign, whose central banks operate under a Gold Standard arrangement. All variables are measured in log-deviations from trend, and Foreign variables are denoted with an asterisk. Output supply in each country is: 9\" Z \"P: 3* x: 29' 2 WP, where y3 and p are Home output supply and price level, yS\" and p* are the corresponding Foreign variables, and n 2 0. Note: n is the same in both countries. Also other parameters below will be assumed identical across countries. Output demand in each country is: -5 (10-30\") - 0%} ny: : 5(pp*)0't*, cc: | | a: where 9'9 and 1' are Home output demand and interest rate on bonds, yo and 1"\" are the corn:L sponding Foreign variables, p p\" is the price of Home goods relative to Foreign ones, 5 > U, and 0 > 0. Note: Demand for Home output decreases, but demand for Foreign output increases, when p 30" increases. Ct Market clearing for Home and Foreign goods requires: 9.3 = yD and :93: = KID\. Explain this result intuitively. Note: Explain intuitively does not mean "state the result in words." It means explain the intuition for this result. Similarly below. . Impose equilibrium in money markets (m = m' and m * = mS*), subtract the Foreign money market equilibrium condition from the Home one, use i = it , and show that the equation you find implies: S = = +h (r - * * ) . . Explain this result intuitively. . Multiply the Home money market equilibrium condition by 1/2, multiply the Foreign money market equilibrium condition by 1/2, use the output supply equa- tions, use i = it, and add the two equations you obtain for Home and Foreign to find: p (1 + ( ) - di = -? (r+ * ) + ,+ gw . . Substitute the relation between bond interest rate and price level that you ob- tained above into this equation and show that the resulting equation implies: where: 2 = 1 + on + 1->0. . Explain this result intuitively