1. Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade deficit. What is the appropriate fiscal and monetary policy mix?
2. In this chapter, we showed that a monetary expansion in an economy operating under flexible exchange rates leads to an increase in output and a depreciation of the domestic currency.
a. How does a monetary expansion (in an economy with flexible exchange rates) affect consumption and investment?
b. How does a monetary expansion (in an economy with flexible exchange rates) affect net exports?