Use Section 11.2.5 to answer the following questions about macroeconomic imbalances in the 2-bloc model:

(a) Use a 2-bloc model to explain in words how there can be constant inflation in each bloc but current account imbalances.

(b) Begin with 2 symmetric blocs. Now assume there is a permanent positive demand shock to bloc \(\mathrm{A}\) and an equal and opposite permanent demand shock to bloc B. Describe the new medium-run equilibrium (MRE). [Hint: draw the \(A D-B T-E R U\) diagrams for the world, bloc A and bloc B before and after the shock as in Fig. 11.14]. Your answer should focus on the differences between the initial and new MRE. Don't discuss the adjustment path to the new MRE. How could you adjust the nature of the shocks so that there was a lower real interest rate in the new MRE?