A government wants to fix its exchange rate, but it does not want to give up its monetary policy. Instead, it imposes a

[answerhappygod]

A Government Wants To Fix Its Exchange Rate But It Does Not Want To Give Up Its Monetary Policy Instead It Imposes A 1 (35.09 KiB) Viewed 68 times

A government wants to fix its exchange rate, but it does not want to give up its monetary policy. Instead, it imposes a per-unit cost of exchanging currency C, so that for every 1 unit of domestic currency converted to 1/ED/F units of foreign currency, a cost of c incurs. There is no cost incurred in the conversion of foreign currency back to domestic currency. ** Part a (5 marks) Modify the exact version of the uncovered interest rate parity to suit this situation. ** Part b (5 marks) Graphically show that it is now possible to change the money supply M³ while keeping the exchange rate pegged (holding other things constant).