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Assume a small open economy operating under fixed exchange rates, and described by the AA-DD model.Consider a fall in world demand for home exports that

Assume a small open economy operating under fixed exchange rates, and described by the AA-DD model.Consider a fall in world demand for home exports that causes Y to fall from Yf to Y1.

a) If the central bank decides to respond to the fall in world demand by changing the exchange rate, describe, in words, what the Central Bank could do?

b) What is the best-case scenario for this change in the exchange rate?

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