1. Suppose the government cuts transfer payments in an economy with an inflationary gap. How would this policy affect real GDP, and the price level? Show your results graphically. 2. Suppose central bank imposes expansionary monetary policy. How would this policy affect bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level? Show your results graphically. 3. Using equation of exchange explain what should central banks do to avoid long run inflation? 4. Using Philips curve illustrate relationship between inflation and unemployment in the short run and long run. 5. The text notes that changes in oil prices can affect the inflation-unemployment outcome. Explain what effect changes in oil prices may have on these two variables. 6. Can there be a deficit on current account and a deficit on capital account at the same time? Briefly explain.