Macroeconomics 5th Edition by Olivier Blanchard

Exercise 8

Fixed exchange rates and foreign macroeconomic policy
Consider a fixed exchange rate system, in which a group of countries (called follower countries) peg their currencies to the currency of one country (called the leader country). Since the currency of the leader country is not fixed against the currencies of countries outside the fixed exchange rate system, the leader country can conduct monetary policy as it wishes. For this problem, consider the domestic country to be a follower country and the foreign country to be the leader country.
a. Redo the analysis of Problem 4(a).
b. Redo the analysis of Problem 4(b).
c. Using your answers to parts (a) and (b) and Problem 4(c), how does a foreign monetary expansion (by the leader country) affect domestic output How does a foreign fiscal expansion (by the leader country) affect domestic output (You may assume that the effect of Y * on domestic output is small.) How do your answers differ from those in 4(d)