1. Malaysia pegs the value of their currency ringgit to the U.S. dollar (fixed ). The Central Bank of Malaysia is committed to protect its fixed exchange rate regime and capital mobility, under all circumstances.

Suppose Malaysia experiences a temporary increase in their real GDP due to the increase in tourism revenue with the widely available vaccines bringing an end to the pandemic. Assume all else is constant.

Consider the FX market and the money market diagrams we learned within the asset approach to exchange rate determination and answer the following questions accordingly. Explain when the questions ask you to explain. Do not include graphical illustrations in your submitted answer but feel free to draw them on a paper as they will help you develop your answer

1. Explain the impact this change would have in the Malaysian money market prior to any interventions by the Central Bank. Which schedule shifts, if any, and why?
2. Explain how you would expect this change to impact the value of the E_ringgit/$ , if the Central Bank does not intervene to protect the peg? Which schedule(s) shift, if any, and why?
3. How should the Central Bank respond to protect the peg and why?