The Burundian authorities recently announced that they would allow foreign investors to buy Burundi's government bonds denominated in Burundi Franc (BIF). Suppose that US investors decide to purchase substantial amounts of these bonds on the secondary Burundian bond market; at the same time, the Reserve Bank of Burundi (RBB), the Burundi central bank, makes it clear that it will NOT intervene in the foreign exchange market.

1. How would this capital inflow affect the dollar value of the Burundi Francs (that is, the exchange rate of $/BIF) and the real interest rate in Burundi? Show graphically and briefly explain.

(Hint: Start with the foreign exchange market, and then move to the real loanable funds market. You only need to consider these two markets here.)

2. Will this capital inflow affect Burundi's monetary base? Its money supply? Briefly explain.