2. Suppose a monetary authority is holding its countrys exchange rate above the equilibrium value by using
Question:
2. Suppose a monetary authority is holding its country’s exchange rate above the equilibrium value by using
$10 billion of foreign currency reserves (e.g., U.S.
dollars) each month to buy domestic currency.
a. How long can this situation last assuming that the country has $100 billion of foreign currency reserves?
b. Is there any way an investor can profit from this situation?
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