Question 2 Using the exchange rate crises models, consider the ERM Crises in 1992 depicted below. (a) Depreciation in Year after 6 European Exchange Rate Crises in 1992 1992 1993 Change in value of 0% currency against German mark -5 (from start, %) -10 Britain (pound) -15 W Portugal (escude) Italy (lira) -20 Finland (markka) Spain (peseta) -25 Sweden (krona) 1 (a) Use the first-generation model to explain the different timing of the ERM Crises in 1992. (hint: use the critical level of reserves with forward looking case.) 1 (b) What is the main difference between the first and second generation exchange rate crises models? 1(c) Use the IS-LM-FX depiction of the second-generation model, show why the UK might have chosen to let the pound float versus France or even Italy, who only suspended the ERM (Hint: mention the costs of the peg and how they increase with risk premia, and how they compare to the benefits.) 1(d) Was the equilibrium outcome for the UK to leave the ERM what is known as a self- fulfilling equilibrium? What must be true about the relative costs and benefits of the peg. 1(e) Why, when compared to the ERM, do the recent crises (energy crisis and Covid-19) put less pressure on fixed exchange rates in Europe