1. "An increase in money supply reduces the interest rate in the short run, but increases the interest rate in the long run." Do you agree on this statement? Please explain why. (20 marks)

2. Suppose that people of a small open economy decide to save more. What will be the impacts of this information on the exchange rate and trade balance? Please illustrate your answer graphically. (You may assume that the economy begins at the initial position that net export is zero in your graph.) (12 marks)