The net export function is given by $Nx,Nx()$ where denotes the real exchange rate; however, in the short$-$run, the same equation is given by $Nx,Nx(e)$ where $e$ denotes the nominal exchange rate.

$(8$ points$)$

a$)$ What are the reasons enable us to express net export as only a function of $e$ in the short$-$run?

$(2$ points$)$

b$)$ Over time and in the long$-$run, is your argument in $($a$)$ above still valid? Justify your position.

$(2$ points$)$

c$)$ "Crawling peg" is the name of an exchange rate system where the domestic exchange rate is linked to an international currency such as U$ or the Euro but adjusted for the difference in inflation. So if the domestic inflation is higher by say $5\%$ over the US rate of inflation, under crawling peg, the domestic currency should depreciate by $5\%$ in front of the $U$$$.$ If you were to choose between the fixed exchange rate regime and the crawling peg for a country characterized by a moderate rate of inflation, which exchange rate system do you choose? Carefully justify your position.

$(4$ points$)$