Suppose an economy operates under a pegged exchange rate to the dollar at the rate of 10 Bananas (B) per US dollar. The central bank wants to adjust the peg to 8B/$.

1. What is the central bank trying to achieve by setting the exchange rate at 8B/$? What will the central bank have to do to achieve the new policy?

2. With the aid of appropriate diagrams, explain

(a) the immediate impact effects after the adoption of the new policy

(b) the adjustment process as the economy adjusts to the new fixed exchange rate.

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1 The central bank is trying to achieve a more competitive exchange rate by setting the exchange rat... View the full answer