n the country of Gondor, people are free to move money into and out of the country without restrictions. There is also a law that the central bank must keep Gondor's currency fixed to the US dollar. Suppose Gondor is at potential output. Think of four things that could happen that would force the Central Bank of Gondor to create INFLATION just to keep the exchange rate fixed.

HINT: inflation would happen if the central bank of Gondor lowered interest rates. The Central Bank of Gondor would need to lower interest rates to keep the exchange rate from rising.

In other words:

A) Something happens that makes Gondor's currency want to RISE

B) The Central Bank of Gondor lowers interest rates to stop the currency from rising

C) There is inflation in Gondor.

So we're really looking for four things that could happen that make Gondor's currency want to rise. That's all this question is.List the things four things like this:

1)

2)

3)

4)