1. Illustrate and describe the effects of expansionary monetary policy in a small open economy that allows their currency to float. What are the effects on r, e and Y?

A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because It decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom Is caused by economic investment expenditure?

Use the demand-and-supply of foreign currency graph to determine what would happen to a small, open economy that experienced capital outflows.

Explain the relationship between a current account deficit or surplus and the flow of funds.

What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?

If the government wants to O decrease; contractionary O increase; expansionary O increase; only rules-based O decrease: expansionary the value of its currency in the foreign exchange market, it can use monetary policy.

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14. Today many Central Banks around the World are thinking of Increasing interest rates. Why? What could be the dangers of increasing those interest rates too much? 15. What will happen to the trade balance and the real exchange rate of a small open economy when govenment purchases increase, such as during a war? Does your answer depend on whether this is a local war or a global war? On those grounds, In the current situation of the Russian invasion, what should happen between the dollar and the Euro?

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5. How exchange rates can affect a firm’s global sales.?