3. You do not have to write a model or provide notation but you are welcome to do so if you find it easier to explain using a model. (a) (9 pts) For a closed economy, explain the effect of expansionary monetary policy on inflation using the proper model with proper terminology. Be explicit in the mechanism. (b) (9 pts) Now explain the same mechanism in an open economy with floating exchange rates and perfect capital mobility. What would be the effect of this policy on current account balance and nominal exchange rates? Explain using proper terminology. 4. (5 pts each) Assume that it is the election year in country Macrostan, which is a closed economy. Macrostan government increased its expenditure to guarantee re-election. For this question, you do not have to write a model or provide notation but you are welcome to do so if you find it easier to explain using a model. (a) Explain the effects of expansionary fiscal policy. In your answer you should clearly explain the effects of this policy on output, interest rates, unemployment, and price level. Make sure that you start from first principles (i.c. the aggregate expenditure model) when you are explaining the effects. How does Macrostan go to its long run equilibrium? (b) Now assume that the central bank wants to act after the government increases its ex- penditures, given its price stability mandate. What should the central bank do? Again, make sure that you clearly explain the effects of monetary policy on output, interest rates, unemployment, and price level. Again, make sure that you start from first prin- ciples (i.c. the aggregate expenditure model) when you are explaining the effects. How does Macrostan go to its long run equilibrium? (c) Explain the effects of inflation expectations in Macrostan on the realization of inflation using AS/AD and Phillips curves. Relate this to the credibility and independence of the central bank. Does this framework help understand what is happening in Turkey? Why or why not? 5. (10 pts) Broadly explain the components of balance of payments. Make sure that you describe what these items measure. Can surplus/deficits of these items be related to the macroeconomic fundamentals and economic policy? 6. (10 pts each) Think about the following model where aggregate supply is given by: Y = S + zP, = > 0. The components of the aggregate demand are given as: C = C+bDI - cP DI = (1 -t)Y I = I -di G =G+ty NX =0 Money demand and supply are given by: Ms = m Md = h - fitey