Following Russia's invasion of Ukraine on 24^th February 2022, the EU and the US have ramped up financial and economic sanctions against Russia - which has now become the most heavily sanctioned economy in the world. This question asks you to consider the effect of the Ukraine-Russia war on the economy of both Russia and the European Union (EU).

1. Under the newly imposed sanctions, Russia has been denied access to many of the goods it typically imports from the countries that are now sanctioning it. How will this impact the Russian economy? Discuss the supply and/or demand mechanism at play.
2. Based on your answer in (2) how do you expect the Russian current account balance to be affected by this shock, assuming Russian exports remain stable?
3. In the first days following the invasion, the Rouble (Russian currency) depreciated significantly against the US Dollar. Using the UIP equation, explain how market expectations relate to this depreciation.
4. Following the imposition of sanctions on February 28^th, the Russian Central Bank increased the domestic interest rate from 9% to 20%. Explain the effect of such a move on the exchange rate of the Rouble against the US Dollar, using UIP equation.
5. As the war progresses, EU countries are discussing the option to stop importing Russian gas. Some preliminary estimates suggest that this would significantly increase energy costs across Europe. Let's assume for a moment that the EU is a single country: how would the EU economy be affected by the decision to stop importing Russian gas? Explain what the supply and/or demand factors at play are.
6. The European Central Bank (ECB) finds itself in a very difficult spot: on one hand, inflation in the Eurozone is above the ECB's target, on the other hand, Europe is significantly exposed to the downside macroeconomic risks from the Ukraine Russia war. Should the ECB tighten monetary policy to curb inflation, or wait? What do you think are the risks of a policy error in this situation?