Suppose that, in preparation to enter the euro area, the Czech Republic fixes the exchange rate of its currency, the koruna, to the euro. Assume that there are no capital controls.

The diagram below shows the supply and demand curves for the koruna and labels the following points: the floating-rate equilibrium price in euros per koruna (); the fixed exchange rate (); and the quantity of koruna demanded () and supplied () at the fixed exchange rate.

a.Specify business cycle conditions for both economic growth and inflation in both the Czech Republic and the euro area under which it would be most difficult to maintain the fixed exchange rate as depicted in the chart. Explain why.