1. Explain the claim: "Countries that run persistent trade deficits are also net borrowers."

2. The next three questions use our short-run open-economy model, assuming perfect capital mobility.

. A.Why is monetary policy less effective with fixed exchange rates than with flexible?

B.Why is fiscal policy less effective with flexible exchange rates than with fixed?

C. Assume you run the central bank of a large open economy with floating exchange rates. Output, unemployment and inflation are where you want them to be. Now the fiscal authorities pass a large tax cut. What policy should you follow to stabilize output? What effects do you anticipate?