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Consider the FX market between US and Thailand. The current spot exchange rate is 30.46 Thai baht per USD, E baht/dollar = 30.46 and the

Consider the FX market between US and Thailand. The current spot exchange rate is 30.46 Thai baht per USD, E_baht/dollar = 30.46 and the Thai baht is fixed against the USD (fixed exchange rate regime).

[5 points] Under a credible and stable fixed exchange rate regime, what do you think the value of E^e_baht/dollar would be?

[8 points] Assume that the expected future exchange rate, E^e_baht/dollarincreases. Assuming everything else constant, what should the Bank of Thailand do if they would like to protect and keep the peg?

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