Use the following information to answer question 17-18.

Suppose an economy was initially at the long run equilibrium. The consumption in the country depends on the disposable income, Y-T, C = C(Y-T), and the investment depends on the interest rate of the country, i, I = I(i). Assume the home country follows a fixed exchange rate system. Now, home country devaluates its currency, increases in the current and expected par values of exchange rate (amount of home currency per one unit of foreign currency).

A. Use the IS-LM-FX model to explain (in words) the short run effects of the devaluation. Be sure to explain movements (shifts) of all curves starting from the initial long run equilibrium, including the reasons for the shifts, and the movements of equilibrium levels (relative to the initial levels) for the interest rate, income (output) level, and the exchange rate (amount of home currency per one unit of foreign currency) to get full marks.

B. Now assume that the consumption in the country depends on the disposable income and the total wealth, Y-T and Wealth, C = C(Y-T, Wealth) and the investment depends on the interest rate and the total wealth of the country, i and Wealth, I = I(i, Wealth). Assume further that the devaluation of the country's currency increases its total wealth significantly due to the valuation effect on the external wealth. Use the IS-LM-FX model to explain (in words) the short run effects of the devaluation with the wealth effect. Be sure to explain movements (shifts) of all curves starting from the short run equilibrium without the valuation effects, including the reasons for the shifts, and the movements of equilibrium levels for the interest rate, income (output) level, and the exchange rate (amount of home currency per one unit of foreign currency) to get full marks.