Specie-Flow Mechanism 1. When Churchill returned England to the gold standard he did so at the old parity prior to World War One. This exchange rate made price levels (when converted into a common currency) instantly higher in England than elsewhere. Using the model presented in class (and appearing in lecture notes on CANVAS), show how this policy change could lead to a massive outflow of gold from England. Use the appropriate diagram in your answer. Fixed Exchange Rates Consider a country, home, that fixes its exchange rates value relative to the USS. The country allows the free flow of capital. The existing rate is Enys=1. Use the IS-LM framework to answer this questions below and explain why you shift the curves that you do. 2, Suppose that the country was to devalue its exchange rate, changing the peg to En/s=1.1. What is the impact of this change on Home's interest rate, output and its trade balance? Suppose instead that home is hit by a money demand shock (Lbar decreases), so that that every level of the interest rate there is a lower demand for money. How does this shock affect output and the interest rate? Explain. Suppose that the US Federal Reserve were to increase its interest rate (only shock in guestion) while Home continues to maintain its fixed exchange rate. How does this shock affect output and interest rate in Home? How does this shock affect Home's stock of international Reserves? 15t Generation Crisis Model Consider a country, home that fixes its exchange rate relative to the USS. The US price level is fixed and the existing rate is En/s=1. All monetary approach assumptions hold and investors are assumed to have perfect foresight with respect to the peg breaking. 5. Suppose that Home is running a large budget deficit that it is financing by forcing the central bank to fund by expanding its money supply. How does the central banks stock of reserves respond over time? What determines the timing of a speculative attack