Answer the following questions about exchange rate regimes:

1. Explain the difference between a fixed exchange rate regime and a floating ex- change rate regime. What policy actions does a country have to follow to maintain a fixed exchange rate? What is a dirty float?
2. The UK has a floating exchange rate and capital mobility. The exchange rate between the US dollar and the UK pound changed from $1.48 dollars per pound on June 23rd, 2016 to $1.36 dollars per pound on June 24th, 2016 following the vote to leave the European Union.
   1. Did the UK pound appreciate or depreciate relative to the US dollar?
   2. Did the change in the exchange rate make it more or less expensive for UK residents to buy goods manufactured in the US?
   3. Does the change in the exchange rate make exporting to the US more or less attractive for UK based firms?
   4. What effect is the change in the exchange rate likely to have on inflation in the UK?
3. Consider an open economy with a fixedexchange rate and perfect capital mobility. Assume that it is impossible to devalue the currency. Suppose that inflation increases. Can the central bank change the interest rate in order to reduce inflation? Is fiscal policy effective in this situation?
4. Consider an open economy with a floatingexchange rate and perfect capital mobility. Suppose that inflation increases. Can the central bank change the interest rate in order to reduce inflation? Is fiscal policy effective in this situation?