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What would happen if instead of intervening to hold the exchange rate fixed, the central bank allows the exchange rate to change to eliminate the
What would happen if instead of intervening to hold the exchange rate fixed, the central bank allows the exchange rate to change to eliminate the disequilibrium? Illustrate the effects on both a foreign exchange graph and an IS-LM-BOP graph explaining which curves shift and why. Explain what happens to the exchange rate, GDP, interest rates, and the current account and capital account.
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