QUESTION 2

A)Assuming perfect capital mobility, discuss how the effectiveness of monetary policy will be affected if a country moves from a fixed to a flexible exchange rate system? (5 marks)

B)Explain the effect of imperfect capital mobility on the effectiveness of monetary policy in an open economy. (5 marks)

C)Explain why a small open economy under perfect capital mobility may be more concerned about managing the value of its exchange rate than its domestic interest rate? (2.5 marks)

3 paragraph