In February 2020, the Hong Kong government announced it would give

each permanent resident over the age of 18 a cash handout of 10,000 HKD

in order to boost spending and ease financial burden.

a. (5 Points) How does this fiscal policy action affect the Hong Kong

economy? Use an AA-DD diagram to illustrate the effect.

b. (5 Points) Assume the Hong Kong Monetary Authority (HKMA) has

committed to maintain a fixed exchange rate between the Hong Kong

dollar (HKD) and the U.S. dollar (USD). What must the HKMA do

in conjunction with this fiscal expansion?