In this question, depreciation of NZD is a decrease in the price of NZD in terms of USD.

Consider the following open economy IS-LM-UIP model (in this question the LM curve will is sloping upwards because the money supply is held fixed not the interest rate). IS: Y = C( Y - D)+( Xi)+G+NX(Y, Y*,E) LM: M=YL(i) P UIP Condition: i=i*- E - E E where He is expected future nominal exchange rate and E is the current nominal exchange rate. This model can be used to reflect either a floating exchange rate regime or a fixed exchange rate regime. You should assume that: the expected future inflation rate is zero (which is why i rather than r appears in the IS expression); the Marshall-Lerner condition holds; and P* and P are exogenously fixed and unchanging (which is why E rather than & appears in the IS expression). Use this model to show diagrammatically and explain the impact that enhanced expectations of a nominal depreciation/devaluation of New Zealand's exchange rate would have on current i, Y, E and business fixed investment expenditure, I, for an economy that is operating under: (a) a floating exchange rate regime (b) a fixed exchange rate regime. In the fixed exchange rate case, comment briefly on the difficulties that a government would have in defending the exchange rate