3 Fixed exchange rates Under a system of fixed exchange rates,the country's central bank stands ready to buy or sell the domestic currency for foreign currency at a predetermined rate. In the context of the Mundell-Fleming model,the central bank shifts the LM*curve as required to keep e at its preannounced rate. This system fixes the nominal exchange rate.In the long run,when prices are flexible,the real exchange rate can move even if the nominal rate is fixed. CHAPTER 12 Aggregate Demand in the Open Economy slide 17 slide 17 § Under a system of fixed exchange rates, the country’s central bank stands ready to buy or sell the domestic currency for foreign currency at a predetermined rate. § In the context of the Mundell-Fleming model, the central bank shifts the LM* curve as required to keep e at its preannounced rate. § This system fixes the nominal exchange rate. In the long run, when prices are flexible, the real exchange rate can move even if the nominal rate is fixed. 3