The Central Bank of Russia has decided that it would like to establish a fixed rate for the Russian Dollar and peg it to the Euro. The Central Bank of Russia intends to target a fixed exchange rate of €1.25 per Russian Dollar.
Describe the required intervention by the Central Bank of Russia (CBR). Make sure to address the following questions: 1) should the CBR purchase or sell Russian Dollars on the foreign exchange market?, 2) how many Russian Dollars should the CBR purchase or sell on the foreign exchange market?, 3) will the Russian Dollar appreciate or depreciate against the Euro, and by how much?, and 4) will the Euro appreciate or depreciate against the Russian Dollar, and by how much? Your answer should explain how you identified these effects, and it should reference economic logic…not only the relevant calculations.
