1. Explain how a widespread and persistent drought could trigger an inflationary spiral. (5 marks)

(2) a. Consider a fixed exchange rate regime. The central bank of Georgetopia considers that the $GP is over-valued (i.e. has appreciated) and is prepared to intervene in the foreign exchange market. Explain what action the central bank could take. (2 marks)

b. Could the central bank adopt this action on a long term basis? (1 marks)

c. Does the central bank have the freedom to engage in this form of intervention on an ongoing basis, if it considers the $GP to be under-valued? (i.e. has depreciated) (2 marks)