6. Plot an AA-DD diagram and include an XX curve, such that the XX curve crosses both the DD and the AA in the short-run equilibrium. Label the equilibrium of this market as point 1. Now, imagine that the government of this economy imposes a fixed exchange rate that coincides with point 1. (a) Imagine the government conducts an expansionary fiscal policy by increasing government expenditure. i. (1 point) Show the new equilibrium under a fixed exchange rate. Explain. Label this as point 2 ii. (1 point) Show the new short-run equilibrium if the economy chooses a floating exchange rate system rather than a fixed one. Explain. Label this point as 3 iii. (1 point) In which of these two systems is the effect of fiscal policy larger? Explain iv. (1 point) What happened with the current account (excess or surplus or excess of deficit) in both cases? In which system is the impact on the current account larger? Explain (b) Redo the initial graph (only with point 1). Now, imagine firms reducing their investments due to some global risks. i. (2 points) Show the new equilibrium under a fixed exchange rate. Label this as point 2. Explain ii. (1 point) Can the central bank conduct monetary policy to help the economy? Discuss 7. Imagine domestic and foreign assets are not perfect substitutes. Then, the new UIP condition is : Ef ,E Ro=Ry+ P =P g g E; where p is the risk premium, B is the total domestic sovereign debt, and A represents the part of these bonds held by the Central Bank (a) (2 points) Using the combined analysis of the FFX and Money markets, show how a sterilized operation can depreciate the domestic currency without changing the domestic interest rate. Explain (b) (2 points) Plot an AA-DD diagram and include an XX curve, such that the XX curve crosses both the DD and the AA in the short-run equilibrium. Label the equilibrium of this market as point 1. Show the effect of this sterilized intervention in the short-run equilibrium of the economy. Is there an excess surplus or deficit in the current account due to this policy