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How should a government respond to an increase in the demand for the country's goods and services by the rest of the world in order to maintain the exchange rate at its fixed value, starting from a position of equilibrium in the foreign exchange market under a fixed exchange rate regime?
Solution
VerifiedAnswered 1 year ago
Answered 1 year ago
Step 1
1 of 2Our task is to imagine that there is an equilibrium in the foreign exchange market, and there is a fixed exchange rate regime.
We have to answer/explain how government must react to keep the exchange rate fixed in a case when there is an increased demand from abroad for domestic goods and services.
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