Question #1: Monetary Policy I:

A) Using a simple graphical evidence illustrate the short-term and the long-term effects of contrac- tionary monetary policy on economic agents.

B) Monetary Policy II: AGREE/DISAGREE: Provide economic reason(s):

VIGNETTE: Country X is undergoing a political crisis and a secession referendum from province Z. The crisis has been dubbed by the media as Z-Exit Movement. The chief economist of Z-Exit has proposed that the best strategy for financial markets development is for province Z to have its own currency separate from country X once the referendum has passed.

Question #2 International Finance:

Badlands is a small open economy, has major trade agreement with and mainly exports (86%) to its eastern neighbor Blue-Inkas. Blue-Inkas exports to Vostistan (a major economic power) con- stitute 80% of its total exports. There is a severe economic contractions and political crisis in Vostistan mostly driven by nationalism from Made-in-Vostistan political party. Badlands just announced that they have discovered vast oil reserves offshore. The household debt-to-income ratio in Blue-Inkas is 200%, the national debt has risen by 15% within the last eight quarters. The major political party in Badlands has instituted a minimum wage policy that will go into effect in under one-month. Vostistan is currently conducting a military expedition in Galaxasica that will cost about two billion Vostistan dollars per year. You have been appointed by an international liquidity provision agency to recommend an economic policy for the three nation states. The policy must take into account exchange rate and monetary policy with the goal of stabilizing each countrys financial markets. What policy tools would you recommend and why? What if scientists have predicted with certainty that a global pandemic will occur within the next three month, how does this affect your proposal(s)? Hint: Start by sketching the effect of each shock and then make your recommendations/proposal.