Following a recession, an economy is 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, rc e and a rise in expected future income, Ye. Its central bank targets the price level, PY.

a) Use diagrams to illustrate the effects of this combined optimism shock on the current account, the interest rate the real exchange rate the nominal money supply and the nominal exchange rate.

b) Infer the changes in the volumes of consumption, saving and investment within the home economy, briefly explaining your results.

c) If this were an Asian economy, briefly discuss the implications of this shock had the domestic nominal wage rate been fixed and had the central bank targeted the nominal exchange rate E.

d) If this were an OECD economy, which had been conducting unconventional monetary policy (UMP), briefly describe any change this would require in its central bank's operations.