Country Y has a fixed peg against the US$. This decision was made in Year t-3 to counter sticky double-digit inflation in the country. Further, Country Y decided to intensify financial account liberalization and was fully integrated into global capital markets by Year t.
(i) Discuss Country Y's economic performance over the six year period highlighting and explaining the key economic vulnerabilities that could result in a currency and financial crisis. Make sure to utilize all relevant analytical tools/formulae such as public debt sustainability and current account sustainability analyses.
(ii) Country Y has been contemplating dollarization. Based on only the given data, selected information and your above vulnerability analysis, briefly discuss three reasons why it might be costly for Country Y to dollarize and adopt the US dollar as its national currency. Utilize AD/AS diagrams to illustrate your discussion.
Note: Observe page limits, formatting guidelines and other instructions.
Use one-inch margins, 12 point Times New Roman font size and single spacing.
Include and reference relevant charts and tables for a well-constructed answer. Points will be given for relevant charts and tables.
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