In the country of Harvard, the Central Bank wants to be able to focus on fighting recessions and inflation, not worrying about the exchange rate. At the same time, the government wants to keep the exchange rate from changing. Suppose the economy is at potential output now. What could happen that would force the Central Bank fo Harvard to stop money from ENTERING Harvard?

HINT:

The government wants to fix the exchange rate, so they have two choices. First, they could raise interest rates whenever the exchange rate wants to fall, and lower interest rates whenever the exchange rate wants to rise. Second, they could stop money from entering whenever the exchange rate wants to rise, and stop money leaving whenever the exchange rate wants to fall. So this question is really just asking what could happen that would make Harvard's exchange rate want to rise. Think of four things that could happen, and list them here:

1)

2)

3)

4)

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