(a) Pugelovian government is attempting to peg the value of its currency (pnut) at a rate of 3.5 pnuts per U.S. dollar, with a band of 2 percent on each side of the central rate. Under the current market condition, nonofficial supply and demand intersect at a rate of 3.0 pnuts per U.S. dollar.

With the aid of a demand-and-supply diagram of foreign exchange market, explain how the Pugelovian government uses official intervention in the foreign exchange market to defend the pegged exchange rate and hence, leads to the change in the government's holding of international reserves and money supply in the country

(b) Based on the condition in part (a), suggest and explain the other measure the Pugelovian government can adopt to defend the exchange rate at 3.5 pnuts per U.S. dollar.