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f) Now suppose that the government of this economy, for short-term political reasons, chooses to keep the official value of the currency unchanged at E'
f) Now suppose that the government of this economy, for short-term political reasons, chooses to keep the official value of the currency unchanged at E' = 1.5. Nonetheless, in the foreign exchange (FX) market there is a widespread expectation that within a year the government will be forced to change the official value of the currency to the level which you calculated in answer to part d). Given such an expectation, and assuming a foreign interest rate of 5% (R* = 0.05), we can calculate that to maintain FX market equilibrium at the official exchange rate of 1.5 the domestic interest rate (R) must be raised to a value of Show/explain your calculation in the space below. (2 marks)
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