A government wants to fix its exchange rate, but it does not want to give up its monetary policy. Instead, it imposes a per-unit cost of exchanging currency c, so that for every 1 unit of domestic currency converted to 1//1/ED/F units of foreign currency, a cost of c incurs. There is no cost incurred in the conversion of foreign currency back to domestic currency.

** Part a (5 marks)

Modify the exact version of the uncovered interest rate parity to suit this situation.

** Part b (5 marks)

Graphically show that it is now possible to change the money supply while keeping the exchange rate pegged (holding other things constant).