Question

(a) Discuss with a real-world example what an optimum currency area is and explain its advantages and disadvantages. (10 marks)

(b) Political tensions and the Covid-19 pandemic have resulted in an 18-month economic recession in Hong Kong since 2019. In the second quarter of 2020, Hong Kong recorded a balance of payment deficit. Suppose that an expansionary monetary policy was suggested. Illustrate the effects of such a policy on Hong Kong, and assess the effectiveness of the policy (There is no need to discuss the effects on China). (10 marks)