During the past decade, oil prices have reached historically high levels, getting to over USD 100 per barrel. Suppose you work for the Central Bank of the UAE, which keeps a fixed FX system (St= 3.6725 AED/USD). The UAEs economy is dependent on oil exports.

(a) Will the increase of oil price increase the supply of USD in UAE?

(b). If your answer to q. (a) is yes, will the St be more or less (than St= 3.6725 AED/USD) in unofficial market? In other words, will AED appreciate or depreciate in the unofficial market?

(c) Now say, your boss (the governor of the central bank) asked you to go to the unofficial market to understand the extent of the (appreciating/depreciating) pressure on the AED/USD exchange rate. Sensing the limitations of unofficial markets (physical black-market with different operating hours in different locations, with no structured transaction system), you decided to check AED/USD exchange rate trend through Bitcoin arbitrage/transactions (A cryptocurrency without physical and time barrier). How would you check it? What could be its advantages and limitations.

(d)Now say you found either from black-market or Bitcoin arbitrage that AED is appreciating against USD. Your boss wants the unofficial rate to be same as the official rate. Should he order to buy or sell USD in UAE foreign exchange market? Why? If he orders to buy USD out from UAE market, will it increase or decrease the amount of AED in UAE market? Will such actions increase or decrease interest rate on AED in UAE?

(e) Now say, being unable to purchase so much USD, your boss has adjusted the official fixed exchange rate as St= 3.50 AED/USD to tilt the official fixed rate towards the unofficial real-world rate. How may this affect UAES export of other commodities?