Exercise 3 Consider a second-generation currency crisis model. Assume the gain of maintaining a fixed interest rate is equivalent to 3% of GDP.

a. Consider the following situation: If the central bank defends the exchange rate parity, counting on the trust of the economic agents, the GDP will fall 1%. If there is no credibility in the regime, the fall in GDP will be 2%. Will market participants trust the exchange rate parity? In this case, will the central bank defend parity?

b. Consider the following situation: If the central bank defends the exchange rate parity, counting on the trust of the economic agents, the GDP will fall 2%. Without trust, the product fall will be 5%. Will the market participants trust the exchange rate parity? In this case, will the central bank defend the parity?