Problem 1 (Real exchange rate) 1. Suppose the expected real interest rate in Hong Kong is 5 percent per year while that in Singapore it is 2 percent per year. What do you expect to happen to the real HK$/SNG exchange rate over the next year? 2. Suppose the expected real interest rate in the United States is 9 percent per year while that in Europe is 3 percent per year. What do you expect to happen to the real dollar / euro exchange rate over the next year? Problem 2 (Debt nanced government spending) Suppose interest parity does not hold exactly, but the true relationship isR = R\" + (E9 E) / E + p(B), where p(B) is a risk premium on domestic government bonds that positively depends on B. Suppose a temporary rise in domestic government spending is financed by issuing additional government debt (an increase i113) and makes do- mestic public bonds risk premium higher. Evaluate the policy's output effects in this situation. Problem 3 (Shifting curves) 1. Write a mathematical expression for the DD curve introduced in class. Explain intuitively what the DD curve is. 2. Graphically illustrate what happens to the DD curve in each of the following cases (a) government spending 5 goes down; (b) nominal exchange rateE goes up; (c) private investment? goes up; (d) aggregate output Y goes up. 3. Write a mathematical expression for the AA curve introduced in class. Explain intuitively what the AA curve is. 4. Graphically illustrate what happens to the AA curve in each of the following cases (a) nominal price level? goes down; (b) money supplyM goes up; (c) nominal exchange rate E goes up; (d) aggregate output Y goes up. 5. Intuitively explain how you decide on whether a change leads to a shift in a curve or a movement along the curve