6. Diagram a market in which the equilibrium dollar price of 1 unit of fictitious currency zee (Z) is $5 (the exchange rate is

$5 = Z1). Then show on your diagram a decline in the demand for zee. LO41.4

a. Referring to your diagram, discuss the adjustment options the United States would have in maintaining the exchange rate at $5 = Z1 under a fixed-exchange-rate system.

b. Suppose that the Fed’s FX reserves increase by 40 million zees as a result of the decline in demand. How many millions of dollars worth of bonds will the Fed have to sell in order to sterilize the accompanying increase in the domestic money supply?