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Describe what happens when the central bank increases the money supply under a fixed exchange rate regime in a world of perfect capital mobility. Use

Describe what happens when the central bank increases the money supply under a fixed exchange rate regime in a world of perfect capital mobility. Use the chart below.

1. Describe the impact of the change in monetary policy.

2. Describe the impact on capital flows and pressure on the exchange rate.

3. Describe the impact of the fixed FX rate regime.

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