The currency of Atlantis is the wimp. In 2010, Atlantis developed a balance-of-payments deficit with the United States as a result of an unanticipated decrease in exports; U.S. citizens cut back on the purchase of Atlantean goods. Assume Atlantis is operating under a system of fixed exchange rates.

a. How does the drop in exports affect the market for wimps?

Identify the deficit graphically.

b. How must the government of Atlantis act (in the short run)

to maintain the value of the wimp?

c. If originally Atlantis had been operating at full employment

(potential GDP), what impact would those events have had on its economy? Explain your answer.

d. The chief economist of Atlantis suggests an expansionary monetary policy to restore full employment; the secretary of commerce suggests a tax cut (expansionary fiscal policy).

Given the fixed exchange rate system, describe the effects of these two policy options on Atlantis’s current account.

e. How would your answers to

a, b, and c change if the two countries operated under a floating rate system?