2. Suppose you are the chief economic adviser in a small open economy with full capital mobility. Consider the following scenarios:

a. Assume that the economy operates under the floating exchange rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win reelection. What policies would you recommend to help the president achieve her goal? (fiscal or monetary policy? expansionary or contractionary?) Illustrate your policy recommendation using the Mundell-Fleming model in both (Y, E) and (Y, r) space. Remember to label your curves and axes carefully and explain your illustrations in words.

b. Your proposed policy in part a comes with some costs in the long run. Can you explain in detail to the president what will likely happen to the economy in the long run if the proposed policy is carried out?