Consider a small open economy with a fixed exchange rate system. Suppose there is a general expectation that the central bank will revalue the domestic currency in the future (i.e. it will reduce the fixed exchange rate defined as the amount of the domestic currency per unit of foreign currency). Explain the short run effects of this on the economy. Use the appropriate graph to illustrate your discussion.
Will recessions starting in the U.S. be more easily transmitted to Canada under a fixed or flexible exchange rate system? Use the appropriate graphs to illustrate your discussion.
Explain the short run effects of this on the economy.