Consider the supply-demand framework for the British pound relative to the US dollar shown in the figure below. The exchange rate is currently $1.80 = 1.00.

a) Suppose that the US government would like to fix the exchange rate at $1.80 = 1.00. The government can use monetary or fiscal policy. Suppose that monetary policy were to change. What would the US Federal Reserve do with interest rates to shift the demand curve to the left from D to D?

b) The US Federal Reserves main policy objectives are to combat inflation and unemployment. Suppose that the US Federal Reserve indicates that given the targets for inflation and unemployment, it will not change interest rates. What fiscal policy could the US government pursue to shift the demand curve to the left? (Hint: the policy could be contractionary or expansionary)

c) Without government intervention to fix the exchange rate at $1.80 = 1.00, briefly explain what would happen to the US dollar and the exchange rate with the British pound?