1. If a country changes its exchange rate, the value of its foreign reserves, measured in the domestic currency, also changes. This latter change may represent a domestic currency gain or loss for the central bank. What happens when a country devalues its currency against the reserve currency? When it revalues? How might this factor affect the potential cost of holding foreign reserves? Make sure to consider the role of inter- est parity in formulating your answer.
2. Analyze the result of a permanent devaluation by an economy caught in a liquidity trap of the sort described.