1. Discuss Balance of Payments and the two components of balance of payments.

2. What is the difference between fixed exchange rate, pegged exchange rate and flexible exchange rate? Also explain the difference between depreciation and devaluation.

3. Explain the purchasing power parity theory of the long run behavior of the exchange rate. Indicate whether there are any circumstances under which you would not expect the PPP relationship to hold.

4. According to Mundell Fleming Model, when exchange rates are fixed and capital is perfectly mobile, will fiscal or monetary policy be more successful? Explain.

5. The Macro economy would like to focus on a policy that will ensure higher level of output in the country. The policy makers need to make a decision within two aspects: either to increase the level of money supply in the country or to reduce taxes by 10%. You are to decide which policy the Macro economy need to adopt assuming that the economy is following a fixed exchange rate system and perfect capital mobility.

6. Discuss which policy (fiscal policy or monetary policy) would be effective under Flexible exchange rate, and perfect capital mobility.