Question
A hypothetical country has an open economy. Assume that this country allows capital to flow freely and that it has a fully independent central bank.
A hypothetical country has an open economy. Assume that this country allows capital to flow freely and that it has a fully independent central bank. This same country would also like to have a fixed exchange rate with the United States. a. Is this possible? If it is possible, explain how a country would maintain a fixed exchange rate with the United States. If it is not possible, explain why not. b. If the Fed (central bank of the United States) decides to decrease the money supply, how would the central bank of the hypothetical country maintain its fixed exchange rate?
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