1 (30 points) Due to Covid-19 pandemic, United Sates experienced slower economic growth and worsened return on investment, which facilitates capital outow to other emerging markets, like China. Use the large open economy model and answer the following questions with well labeled graphs. i) Use the classical (longrun) theory to analyze the long-run impacts of the Covidl9 pandemic on the real interest rate, output, investment, net capital outow, trade balance and real exchange rate. ii) USe the lS-LM paradigm to analyze the short-run impact of the Covid-IQ pandemic on the real interest rate, output, investment, net capital outow, trade balance and nominal exchange rate. 2. (30 points) Suppose that the International Monetary Fund (IMF) is concerned about currency depreciation of a small open economy in the long run. a. What type of scal policy should the IMF propose to the government ofthe small open economy to genomic a currency appreciation? b. Illustrate graphically the impact of the IMF proposal on the exchange rate of the small open economy. c. What will happen to the trade balance of the small open economy, assuming that it started From a position of balanced trade? a-n pm _1m"u_