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1.9 (Ch. 6) Effect of High Oil Prices and CB Intervention. During the past decade, oil prices have reached historically high levels, getting to over

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1.9 (Ch. 6) Effect of High Oil Prices and CB Intervention. During the past decade, oil prices have reached historically high levels, getting to over USD 100 per barrel. Suppose you work for the Central Bank of the UAE, which keeps a fixed FX system (S,= 3.6725 AED/USD). The UAE's economy is dependent on oil exports. (a) Describe the pressures the AED faces due to the increase in oil prices? What does the CB of the UAE have to do in order to support the fixed FX exchange rate? Do the FX reserves increase or decrease in the UAE? (b) What is the impact on the UAE's domestic money supply and interest rates? (c) How can the CB neutralize (sterilize) the effect of high oil prices on the UAE's money supply

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