Consider a noncenter home country that is part of a fixed exchange rate regime. The home country currently has output higher than its desired level. Concerned about inflationary pressures, central bankers want to contract the money supply. Using the IS‒LM diagrams for a home and a foreign country, show how each of the following would affect home and foreign output. In which cases are the monetary policy objectives inconsistent with the home country remaining in the fixed exchange rate regime?

a. The foreign country is a center country. Compare a cooperative versus a noncooperative adjustment in interest rates.

b. The foreign country is a noncenter country. Compare a cooperative versus a noncooperative adjustment in exchange rates.