Central bank respond to maintain the fixed exchange rate

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Reference no: EM131097147

Suppose that an economy suddenly, deliberately fixes its exchange rate at a value that gives it a competitive advantage in world markets for trading goods (i.e., it devalues). (a) What would you expect would happen to the demand for its currency in world markets once its exports are cheaper? How will the central bank respond to maintain the fixed exchange rate? Explain. (b) What will happen to the economy’s money supply as the central bank acts to maintain the fixed exchange rate? Explain actions the central bank could take to ensure the money supply is unaffected.

Reference no: EM131097147

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