1. a. Assume a country is in a fixed exchange rate regime such as China. Explain what factors might cause individuals to expect that a country will revalue its currency. Explain the various actions that policy makers can choose in response to this expected revaluation.
b. Assume a country is in a fixed exchange rate regime. Now suppose that individuals expect that policy makers will devalue its currency. Explain the various actions that policy makers can choose in response to this expected devaluation.
c. Suppose the economy is operating below the natural level of output. Discuss the arguments for and against using devaluation in such a situation.
d. Suppose the economy is initially operating above the natural level of output. In a fixed exchange rate regime, explain how the economy will adjust to this situation.