Consider the following classical open economy:

AD curve Y = 400 + 50(M/P)

AS curve Y = Y* = 1000

This economy produces only pizzas, its output is measured in terms of pizzas, and its currency is euro. It trades with a country that produces only cokes, and the currency of that country is dollars. The real exchange rate, e, equals 5 cans of coke per slice of pizza. The foreign prices level is 20 dollars per can of coke, and the domestic money supply is 48 euro.

Questions:

a. What is the domestic price level? What is the fundamental value of the (nominal) exchange rate?

b. Suppose that the domestic country fixes its exchange rate at 50 dollars per euro. Is its currency overvalued, undervalued, or neither? What will happen to the domestic central bank's stock of official reserve assets if it maintains the exchange rate at 50 dollars per euro?

c. Suppose that the domestic country wants a money supply level that equalizes the fundamental value of the exchange rate and the fixed rate of 50 dollars per euro. What level of the domestic money supply achieves this goal?