1. How will a change in the world interest rate affect the equilibrium level of output when:

i)Capital mobility is low and exchange rates are fixed? 3 MARKS

ii)Capital mobility is perfect and exchange rates are flexible?(3 marks)

2.Develop a simple model of inflation by identifying at least two exogenous variables and describing, briefly, how the value of these exogenous variables will impact the rate of increase in the overall level of prices in the economy. (7 marks)