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 Y^f 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 should the central bank do?

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

c) Identify, and explain three things that can go wrong if the central bank changes the exchange rate.

d) True, false, or uncertain (and explain)?A central bank can always weaken its currency.

e) Identify one central bank that has sought to depreciate its currency in recent years. How and why did it do so?