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:

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.

b. a fall in the foreign money supply M . Assume the exchange rate is floating.

2. Using diagrams analyze the impact on domestic Y and i of the following independent shocks in the Fleming-Mundell model:

a. Investors believe that in the foreign economy a left wing government with unsound economic policies will replace the pro business government. There is a fixed exchange rate and perfect capital mobility.

b. Foreign preferences for domestic goods falls. There is a floating exchange rate and imperfect capital mobility.

c. For the shock in (b) state the long run effect on domestic investment I.

3. Compare the short and long run effects on the depreciation rate of the domestic currency for the following independent shocks. Expectations are adaptive.

a. The foreign money growth rate rises.

b. The price of oil experiences a transitory rise. Assume the domestic economy is more dependent on oil than the foreign economy.

c. For the shock in (a) compare short and long run depreciation of the domestic currency if investors have Rational Expectations.

4. The foreign and domestic economies are initially at potential GDP. The domestic economy is small and the foreign economy is large. The exchange rate is floating and capital is perfectly mobile. Assume a Keynesian model so that adjustment to any shock is lagged. Using the AD-AS model analyze the short run impact on domestic X M, I, C, Y, P and E for the following shock:

Environmental toxins discharged into water result in 15 percent of domestic farmland being rendered useless for cultivation.

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,1,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 2. Using diagrams analyze the impact on domestic Y and i of the following independent shocks in the Fleming-Mundell model. (5) a. Investors believe that in the foreign economy a left wing government with unsound economic policies will replace the pro business government. There is a fixed exchange rate and perfect capital mobility. (5) b. Foreign preferences for domestic goods falls. There is a floating exchange rate and imperfect capital mobility. (5) c. For the shock in (b) state the long run effect on domestic investment I. 3. Compare the short and long run effects on the depreciation rate of the domestic currency for the following independent shocks. Expectations are adaptive. (5) a. The foreign money growth rate rises. (5) b. The price of oil experiences a transitory rise. Assume the domestic economy is more dependent on oil than the foreign economy. (10) c. For the shock in (a) compare short and long run depreciation of the domestic currency if investors have Rational Expectations. 4. (10) The foreign and domestic economies are initially at potential GDP. The domestic economy is small and the foreign economy is large. The exchange rate is floating and capital is perfectly mobile. Assume a Keynesian model so that adjustment to any shock is lagged. Using the AD-AS model analyze the short run impact on domestic X M,1,C,Y, P and E for the following shock: Environmental toxins discharged into water result in 15 percent of domestic farmland being rendered useless for cultivation. 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,1,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 2. Using diagrams analyze the impact on domestic Y and i of the following independent shocks in the Fleming-Mundell model. (5) a. Investors believe that in the foreign economy a left wing government with unsound economic policies will replace the pro business government. There is a fixed exchange rate and perfect capital mobility. (5) b. Foreign preferences for domestic goods falls. There is a floating exchange rate and imperfect capital mobility. (5) c. For the shock in (b) state the long run effect on domestic investment I. 3. Compare the short and long run effects on the depreciation rate of the domestic currency for the following independent shocks. Expectations are adaptive. (5) a. The foreign money growth rate rises. (5) b. The price of oil experiences a transitory rise. Assume the domestic economy is more dependent on oil than the foreign economy. (10) c. For the shock in (a) compare short and long run depreciation of the domestic currency if investors have Rational Expectations. 4. (10) The foreign and domestic economies are initially at potential GDP. The domestic economy is small and the foreign economy is large. The exchange rate is floating and capital is perfectly mobile. Assume a Keynesian model so that adjustment to any shock is lagged. Using the AD-AS model analyze the short run impact on domestic X M,1,C,Y, P and E for the following shock: Environmental toxins discharged into water result in 15 percent of domestic farmland being rendered useless for cultivation