n the last half of 2014, the world price of oil fell by about 50%. At the same time, interna- tional economic sanctions were imposed on Russia in response to its annexation of Ukraine's Crimean Peninsula. Thus, Russia's economy experienced a massive capital outflow. (a) Discuss the effects of this on the Russian currency and why that might be a problem for the Russian economy. (b) What can the Central Bank of the Russian Federation do to reduce the problem? What are the trade-offs associated with their potential policy responses? (c) Is the IPC modified for imperfect asset substitutability (as in Question 1), i.e., a change in risk, a useful tool for thinking about the capital outflow? Explain what kind of risk investors face in Russia. If it is, demonstrate how this would effect the equilibrium exchange rate using the asset market model