In the late 1990s, several East Asian countries used limited flexibility or currency pegs in managing their exchange rates relative to the U.S. dollar. This question considers how different countries responded to the East Asian Currency Crisis (19971998). For the following questions, treat the East Asian country as the home country and the United States as the foreign country. Also, for the diagrams, you may assume these countries maintained a currency peg (fixed rate) relative to the U.S. dollar. Also, for the following questions, you need consider only the short-run effectsMalaysia had a similar experience, except that it used capital controls to maintain its currency peg and preserve the level of its interest rate. Illustrate how this change in investors expectations affects the Malaysian money market and the FX market, with the exchange rate defined as ringgit (RM) per U.S. dollar, denotedERM/$. You need show only the short-run effects of this change in investors expectations.
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