China was the only major economy that grew last year despite challenges posed by the COVID-19 pandemic. As a result, several credit rating agencies recently affirmed that Chinese bonds now bear relatively less risk compared to bonds issued by other countries.

a. Let China be the domestic country. Use the Adjusted Uncovered Interest Parity Conditionalong with diagramsshowing the spot exchange rate, expected currency returns, and real money holdings to explain how the equilibrium spot exchange rate responds to this recent announcement. (4 points)

b. Suppose the People's Bank of China (PBOC), China's central bank, wants to counteract any exchange rate effects resulting from this recent announcement.Using the same diagram above, show and explain how the PBOC could intervene in the money markets to maintain the pre-announcement exchange rate level. (3 points)

c. Suppose the PBOC not only wants to counteract any exchange rate effects resulting from this recent announcement but also keep its money supply unchanged.Explain in wordshow the PBOC can achieve this. (3 points)