AlphaandBetaare two countries.Alphauses dollars ($) andBetauses pounds (). TreatAlphaas the home country and define the bilateral exchange rate as the number of pounds that exchange for one dollar:

=/$

The following table provides some annual exchange rate data.

e

2016 0.6

2017 0.56

2018 0.50

2019 0.45

(i) Discuss how the theory of Purchasing Power Parity would explain the behaviour of the exchange rate over the period 2016 to 2019?

(ii) Suppose we use the supply and demand model to interpret the above data. Examine the ability of differences in the growth rates of real GDP betweenAlphaandBetato explain the behaviour of the exchange rate over the period 2016 to 2019?

(iii) Suppose the government ofAlphadecided to fix the exchange rate in 2019 to

its value in 2016.

a)Use a diagram to illustrate the foreign exchange market forAlphain 2019. Describe any actions being undertaken by the central bank.

b)SupposeAlpha'scurrency was subject to a speculative attack in 2019.

Explain what this would involve.

c) Could the central bank ofAlphadefend the currency against the speculative attack? Explain whether there any costs of doing so?