Consider Country A, which uses a fixed exchange rate system pegging its currency value against the US dollars and has perfect capital mobility. If the U.S. real income falls by 2% permanently, other things being equal, then:

a. The Reserve Bank of Country A would have to lower its interest rate by 2 percentage points permanently in the long run.

b. The Reserve Bank of Country A would have to lower its money supply by 2% permanently in the long run.

c. The Reserve Bank of Country A would have to raise its interest rate by 2 percentage points permanently in the long run.

d. The Reserve Bank of Country A would have to raise its money supply by 2% permanently in the long run.

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In a fixed exchange rate system with perfect capital mobility changes in the ... View the full answer