In the recent past, Zambia, which is a net importing economy has passed through some serious macroeconomic turbulences and balance of payment challenges. Under a floating exchange rate regime, a monetary expansion policy by Zambia led to hyper-inflation and currency crisis. Coupled with economic isolation, this led to a complete loss of monetary autonomy; Zambia abandoned its own currency replacing it with a basket of currencies, with the US dollar emerging as the most widely used currency.

Required:

a)        Using the Monetary Approach to balance of payment adjustment model and illustrations, evaluate how the monetary  policy expansion under a floating exchange rate may have led to Zambia currency problems      

b)       Explain how Zambia is affected by inflation developments in the US given the above case study.