Suppose an economy is considering pegging its exchange rate to the dollar. It is currently trading at 10
Bananas (B) per US dollar. The central bank intend the rate to be 8 B/$.

1.  What is the central bank trying to achieve by setting the exchange rate at 8 B/$? What will be
required to install this policy? What are the shortand long run consequences of this policy?
2.  Using techniques developed in class, fully characterized the move from flexible to fixed
exchange in both the short run and long run. Be sure to include the policy’s impact on all the
relevant macroeconomic variables