Repeat the previous question, assuming the central bank responds in order to maintain a fixed exchange rate. In which case or cases will the government response be the same as in the previous question?
See the following diagrams. Point B is identical to the outcomes shown in Question 3. Point C shows the outcome when monetary policy is used to fix the exchange rate.
a. Foreign output decreases.
b. Investors expect a depreciation of the Home currency.
c. The money supply increases.
d. Government spending increases.