a) Assume fixed exchange rate and that the surrounding world’s nominal interest rate is 3 percent. What rate must the central bank set if…
i) Investors see a 50-percent risk that the country’s currency will be devalved with 10 % the coming year.
ii) Investors are convinced that the country will devalve its currency with 10%
Compare and interpret the different answers
b) How does an adaptation against a new long-term equilibrium look like after the public suddenly start to save more money? Use the IS-IP-PC curves and assume fixed exchange rate and that we initialy were situated in a long-term equilibrium.