In a three-country world, a central bank fixes one exchange rate but lets the others float.

1. Can it use monetary policy to affect output?

2. Can it fix both exchange rates?

Suppose the central bank of a small country with a fixed exchange rate is faced by a rise in the world interest rate, R*.

1. What is the effect on its foreign reserve holdings? on its money supply?
2. Can it offset either of these effects through domestic open-market operations?