The Korean won (= home currency) is credibly pegged to the USD (=foreign curreny) at the official rate E = 1000. The home country(=Korea) has the following features: MPCH =0.5, MPCF=0.25, EX = EX + aq +B(Y* -T), and IM=IM + MPC, (Y-T)- yq. All imports are for household consumption only. Now suppose that, starting from the initial eq'm 1, the Korean gov't increases its purchages by AG = 4. Refer to the following figures describing the initial and new SR eq'm under the peg. 1. An increase in government spending shifts the IS curve right... 15 IS 2.... which would tend to raise the interest rate... 1. An increase in government spending shifts the IS curve right... 15 15, 2.... which would tend to raise the interest rate... 7. Output rises dramatically. LM, Domestic and foreign returns 5. The money supply expands, so the LM curve shifts down. LM, LM 6. The interest rate is unchanged, so the peg holds. 4 Domestic and foreign returns 4. The exchange rate would tend to appreciate away from the fixed rate. The monetary authority must intervene. 3.... and raise the domestic return. FR DR DR E 3.... and raise the domestic return. DR DR FR 3. Figure out how much each variable below changes as the home country moves from 1 to Y EX IM TB