1. Assume that capital is perfectly mobile. The foreign and domestic economies are initially at potential GDP. The domestic economy is small and the foreign economy is large. Using the AD-AS model analyze the long run impact on domestic X M, I, C, Y and P of the following independent shocks. (10)

a. Suppose

domestic consumption depends positively on real wealth meaning that rises in

real wealth increase consumption. Let investor fears cause a domestic stock

market crash. Assume the exchange rate is fixed. (10)

b. a fall

in the foreign money supply M . Assume

the exchange rate is floating.