Problem
1. Suppose the central bank of a small country is faced by a rise in the world interest rate, R*. What is the effect on its foreign reserve holdings? On its money supply? Can it offset either of these effects through domestic open-market operations?
2. How might restrictions on private financial account transactions alter the problem of attaining internal and external balance with a fixed exchange rate? What costs might such restrictions involve?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.