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Suppose the Mexican central bank chose to peg the peso to the U.S. dollar and commit to a fixed peso/dollar exchange rate. Use a graph
Suppose the Mexican central bank chose to peg the peso to the U.S. dollar and commit to a fixed peso/dollar exchange rate. Use a graph of the market for peso assets (foreign exchange) to show and explain how the peg must be maintained if a shock in the U.S. economy forces the Fed to pursue contractionary monetary policy. What does this say about the ability of central banks to address domestic economic problems while maintaining a pegged exchange rate?
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