1i) Suppose that the economy is experiencing a high unemployment rate and at the same time, inflation is quite high. How can the economy return to the natural rate of unemployment if policymakers also want to achieve low inflation? Will it be possible to achieve both in the short run? Please answer this question with a well-illustrated diagram. (14 marks)

1ii) From time to time, individual countries face adverse economic conditions. In some cases, that may result in the domestic currency depreciating dramatically. Explain why a typical policy response taken by the authorities in such cases is to increase nominal interest rates. When they do so, what happens to domestic economic activity and net capital outflow? (10 marks)

1iii) A can of beer costs US$0.9 in the US and 6 yuan in China. What will the yuan-dollar exchange rate be if purchasing power parity holds? If the current nominal exchange rate is 6.79 yuan per US dollar, is the Chinese yuan under- or overvalued? (8 marks)

1iv) If all prices in the US decrease by five per cent, what will happen to the yuan-dollar exchange rate? (4 marks)

1v) Due to COVID-19, an economy that is initially at full employment faces a substantial decrease in consumption and investment. With this in mind, answer the following questions.

(a) Discuss, with the aid of aggregate output market and money market diagrams, the short-term effect on output, unemployment, the general price level and interest rate. (9 marks)

(b) Discuss, with the aid of an aggregate output market diagram, what kind of monetary policy can be adopted to restore the economy to the full employment equilibrium. (9 marks)

(c) Suppose the problems discussed in part (a) rely on the self-adjustment mechanism instead of the discretionary policy proposed in part (b). Examine the possible impacts of minimum wage on the self-adjustment mechanism. (9 marks)

1vi)

(a) Introductory economics textbooks frequently claim that central banks can perfectly control money supply and present diagrams of the money market with a vertical money supply curve. Explain why this is an oversimplification and why it is not an accurate portrayal of the real- world situation. (9 marks)

(b) According to the quantity theory of money, what is the effect of an 18 per cent decrease in the quantity of money? Explain. (5 marks)

1vii) Suppose that the US government imposes a quota on some of China's electronic products. What will be the impact of this policy on the US electronics industry? What will be the impact on other US export industries? (14 marks)

1viii) Don is a resident of the US and he buys software from a French company. Explain why and in what directions this changes US net exports and US net capital outflow. (9 marks)