Using the central bank balance sheet diagrams, evaluate how each of the following shocks affects a country’s ability to defend a fixed exchange rate. In the following answers, we assume the central bank keeps domestic credit unchanged whenever possible. See the following graphs.
a. The central bank sells government bonds.

b. Currency traders expect a depreciation in the home currency in the future.

c. An economic contraction leads to a change in home money demand.

d. The foreign interest rate falls.