Suppose a country decides to peg its exchange rate at some chosen level E.

a. Use the approximate version of the interest parity condition to derive the domestic interest rate in this case. Explain the effectiveness of monetary policy under the fixed exchange rate. (6 points) b. Suppose there is a fiscal expansion. Use IS-LM model to explain why fiscal policy is more effective than under flexible exchange rate. (Note the equilibrium interest rate in your graph and clearly label what it equals to. In addition to drawing graphs, you need to explain in several sentences.) (6 points)