40 35 30 25 20 9 11 13 15 17 Billions of Reals Traded for Dollars (a) Pegging an exchange rate below equilibrium In the above graph the central bank of Brazil aims to peg the Real to 30 cents per Real. The peg now is below market equilibrium (Eo). Assume the central bank wants to restore the peg by directly intervening in the foreign exchange market. What should the central bank do? Explain your answer. Cents/Real

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