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In: Economics

Central African CFA franc (XAF) is a currency used by 14 African countries and it is...

Central African CFA franc (XAF) is a currency used by 14 African countries and it is pegged to the Euro (fixed ECFA/EURO). The currency union countries are committed to protect the CFA franc, and the fixed exchange rate regime and capital mobility, under all circumstances.

Suppose that a political scandal in the area causes disturbances in the area, across multiple countries. Due to this news, investors revise their exchange rate forecasts and expect CFA franc to depreciate against the euro in the future. Provide your answers in brief bulleted points.

  1. What happens in the FX market following the change in exchange rate forecasts? Explain which schedule(s) shift and why. Assume CFA franc to be the home currency. (what happens to domestic return, foreign return, etc.)
  2. How does the equilibrium ECFA/EURO  exchange rate change? Why? (which way does it shift)
  3. What happens in the currency union money market following the change in exchange rate forecasts? Explain which schedule(s) shift and why. (what happens to money supply, money demand, nominal interest rate, etc)
  4. What happens to the equilibrium interest rate? Why? (increase or decrease, and why?)

(Please show the graphs you draw, and if possible typed answers. Please also do not copy other answers that are on Chegg, as those are wrong. Thank you.)

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Expert Solution

Rahul Sunny answered 2 years ago
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