5. You are the head of the central bank of a country with a fixed exchange rate...

5. You are the head of the central bank of a country with a fixed exchange rate and open capital markets. Then there is a bad piece of news which you think will cause the currency to depreciate by 20% if you do nothing.

a. What are 3 possible responses you can make? Draw FX market diagrams to illustrate your choices.

b. Explain how these 3 choices illustrate the trilemma.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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