During the 1997 Asian Financial Crisis, the International Monetary Fund (IMF) recommended that the most-affected Asian countries should float their currencies and increase the interest rates.
a) Explain why it is difficult for a country (e.g., Thailand) to maintain a fixed exchange rate system when there is a surge of capital outflow?
b) Use an example to illustrate how a rise in interest rate is expected to affect exchange rate.
c) What other effects would higher interest rates have on the economy? Comment on the challenges Asian economies now face as most advanced economies have been raising interest rates to combat inflation.
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