Suppose that Albernias central bank has fixed the value of itscurrency, the bern, to the
Chapter 8, Problem 12(choose chapter or problem)
Suppose that Albernias central bank has fixed the value of itscurrency, the bern, to the U.S. dollar (at a rate of US$1.50 to1 bern) and is committed to that exchange rate. Initially,the foreign exchange market for the bern is also in equilib-rium, as shown in the accompanying diagram. However, bothAlbernians and Americans begin to believe that there are bigrisks in holding Albernian assets; as a result, they become unwillingto hold Albernian assets unless they receive a higherrate of return on them than they do on U.S. assets. How wouldthis affect the diagram? If the Albernian central bank tries tokeep the exchange rate fixed using monetary policy, how willthis affect the Albernian economy?
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