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Need digram and explanation Nominal Year Acirema CPI Niatirb CPI R(ACD/NID) 2000 100 100 1.20 2001 106 86 1.23 2002 114 104 1.18 Suppose Acirema

Need digram and explanation

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Nominal Year Acirema CPI Niatirb CPI R(ACD/NID) 2000 100 100 1.20 2001 106 86 1.23 2002 114 104 1.18 Suppose Acirema fixes its currency against the NID, using the NID as its reserve currency. The peg is at 1.25 ACD per NID. Assume that this is for all practical purposes a fix, right now, where the market price would be. (a) Using a fully-labelled graph, illustrate this initial situation. (b) What happens on this market if agents who hold ACDs begin to doubt that the Acirema's central bank can truly sustain the fixed rate? Illustrate on a fresh graph and explain what happens in the presence of the fix. Is Acirema's central bank gaining or losing reserves? If this persists, what is the long-term outlook for the ACD? (c) Take another case, starting from the situation in (a) again. If inflation starts to rise in Acirema, and becomes significantly higher than in Niatirb, what does that do on the FX market (the market for NIDs) in the presence of the fix? Illustrate and explain

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