Based on fixed exchange rate and/or flexible exchange rate regime from the perspective of macroeconomic policy in an open macroeconomic model. Please do not use textbook explanations, answer in your own words and be sure to use a graph to illustrate your answer.
Please use the relevant symbols and notation on each of the lines and axis on the graph(s) so as to clearly indicate the working mechanism of variables.
A) Assume a country is in a fixed exchange rate regime such as China.
• What factors might cause individuals to expect that a country like China will devalue her currency?
• What are some actions that policy makers can choose in response to this expected devaluation?
B) Assume a country is in a fixed exchange rate regime such as China.
• Now suppose that individuals expect that policy makers will devalue China’s currency.
• What actions can policy makers take in response to this expected devaluation?
C) What are some arguments for and against using devaluation if an economy is operating below the natural level of output?
D) Suppose the economy is initially operating above the natural level of output. In a fixed exchange rate regime, how will the economy adjust to this situation?