The Central Bank of Saxony (CBS) has decided that universal home ownership isno longera worthwhile goal. The current home foreclosure and default rates are negatively affecting the economic performance of the country of Saxony. To discourage new home construction and purchases, the CBScontracts the Saxony money supplysignificantly.

1. Assuming that CBS is also committed to keeping the exchange rate between the scudo (Saxony's currency) and the lira (Saxony's major trading partner's currency) fixed, what must the central bank do to maintain the fixed exchange rate system?
2. How will the defense of the fixed exchange rate affect the following variables:
3. domestic interest rates; domestic money supply/monetary base; domestic unemployment; and domestic real GDP?Assume the official intervention to maintain the fixed exchange rate was not sterilized.Explain in order to receive full credit.
4. domestic interest rates; domestic money supply/monetary base; domestic unemployment; and domestic real GDP?Assume the official intervention to maintain the fixed exchange rate was sterilized.Explain in order to receive full credit.