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| Repeat the previous question, assuming the central bank responds in order to maintain a fixed exchange rate. In which case or cases will the government response be the same as in the previous question? See the following diagrams. Point B is identical to the outcomes shown in Question 3. Point C shows the outcome when monetary policy is used to fix the exchange rate. a. Foreign output decreases. b. Investors expect a depreciation of the Home currency. c. The money supply increases. d. Government spending increases. |
