An economy that has been recessed with very low short maturity yields has embarked on a period of unconventional monetary policy (UMP), causing a significant enlargement of its central bank's balance sheet. It is now subjected to a financial optimism shock that takes the form of a rise in the expected, risk adjusted, net rate of return on installed capital, r_c^e and a rise in expected future income, Y^e. Its central bank targets the price level, P_Y.

1. Assuming no further changes in the nominal money supply, use diagrams to illustrate the effects of this combined optimism shock on the yield on long maturity instruments, the current account, the real exchange rate, and the nominal exchange rate.
2. Infer the changes in the volumes of consumption, saving and investment within the home economy, briefly explaining your results.
3. Describe any change this would require in its central bank's operations. In particular, discuss the two options the central bank would have to control the undesirable effects associated with the economic resurgence. Would the yield on short maturity assets, necessarily need to change? If so, in what direction?