Central African CFA franc (XAF) is a currency used by 14 African countries and it is pegged to the Euro (fixed ECFA/EURO). The currency union countries are committed to protect the CFA franc, and the fixed exchange rate regime and capital mobility, under all circumstances. Suppose that a political scandal in the area causes disturbances across multiple countries. Due to this news, investors revise their exchange rate forecasts and expect CFA franc to depreciate against the euro in the future.

a. What happens in the FX market following the change in exchange rate forecasts? Explain which schedule(s) shift and why. Assume CFA franc to be the home currency.

b. How should the monetary authority respond to the revision in the exchange rate forecast if they are committed to keep the peg? Explain which schedule(s) shift and why.