Suppose now that financial investors fear a devaluation of the escudo and launch a speculative attack. That changes the supply of escudos to 2000+ 4500e. Find the new fundamental value of the escudo. What happens with the foreign reserves of the Iberian central bank?

Why the fear of devaluation can be considered a self-fulfilling prophecy?

v

(5 points) Imagine now that that Iberia decides to convert its exchange rate to a flexible system. What would happen if investors decide to sell escudos now? Think about the balance of pavments. exchange rate, Net exports, and interest rates

vi.

(5 points) How would monetary policy be affected by the conversion to the flexible exchange rate?