Refer to the following diagram to help you answer this question. Under fixed exchange rates, the automatic adjustment mechanism will lead to Select one: a. a fall in the money supply, a fall in income, and a fall in the interest rate. b. a rise in the money supply, a fall in income, and a fall in the interest rate. c. a fall in the money supply, a rise in income, and a rise in the interest rate. d. a fall in the money supply, a fall in income, and a rise in the interest rate.

Central Banks are responsible for setting interest rates not the value of the domestic currency. The Bank of Canada doesn’t try to set the dollar’s exchange rate. "We let markets set its value. Because the Bank of Canada lets the Canadian dollar float, we can focus on setting interest rates to maintain inflation at 2 percent in Canada" https://www.bankofcanada.ca/2020/08/understanding-exchange-rates/Read the above explainer from the Bank of Canada and then offer your own understanding of why the Canadian dollar moves against other currencies. Use recent movements in the C$ against the US$ to illustrate your comments.

E2 a, Show the impact of uncertainty in the United Kingdom’s financial system on the market for dollars. What is the effect on the dollar exchange rate? b. How, in this case, could the Federal Reserve maintain a fixed exchange rate? Refer to the central bank’s role in setting interest rates in your answer.

3. The currency stabilization fund Suppose the Russian government recognizes that its reliance on oil exports makes it vulnerable to the Dutch Disease. On the one hand, if oil prices increase, the Russian ruble will appreciate, the real exchange rate will increase, and the nation's exports will become more expensive for other countries to buy. On the other hand, if oil prices fall, the Russian ruble will depreciate, and the country's revenues will decline. The Russian government creates a currency stabilization fund to maintain a stable exchange rate to avoid a negative outcome. To stabilize the value of a currency within a certain range, the stabilization fund managers take one of the following actions: • If the ruble depreciates below some threshold value (a floor) per ruble, the fund managers will purchase the excess supply of rubles in the international exchange market to increase the value of the ruble to at least the floor value. • If the ruble appreciates above some threshold…