Suppose that there is a cost to carrying out transactions in the foreign exchange market. That is,

Question:

Suppose that there is a cost to carrying out transactions in the foreign exchange market. That is, to purchase one unit of foreign currency requires e(1 + a) units of domestic currency, where e is the nominal and a is a proportional fee. Suppose that a decreases. What will be the equilibrium effects under a flexible regime, and under a fixed regime? Explain your results.

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...