Question

In: Economics

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.

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