Use the following information to answer questions 10 and 11.

Suppose the home 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 floating exchange rate system. Now, there is an increase of the expected future spot exchange rate (units of home currency per one unit of foreign currency).

11.Following the increase of the expected future spot exchange rate, the government of the home country changes the government spending to maintain the output at the initial level. Use the IS-LM-FX model to explain (in words) the short run effects of this policy. Be sure to explain

(i) movements (shifts) of all curvesstarting from theshort run equilibriumafter the increase of the expected future spot exchange rate but before the policy implementation including

(ii) the reasons for the shifts, and

(iii) the movements of equilibrium levels relative to the initial long-run 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.