A country with a fixed exchange rate experiences downward pressure on the exchange rate value of its currency (the home currency tend to depreciate). The central bank chooses to intervene in the market to maintain its fixed exchange rate.

(i)How would the central bank go about intervening?

(ii) If the pressures for the currency to depreciate persist for a long period, what would be the difficulty facing the central bank?

(iii)Given the difficulty in question (ii), if the central bank decides to reduce money supply, how would that affect interest rate, exchange rate and domestic economy?