Suppose a large open economy with a floating exchange rate experiences sharp increases

in the value of financial asset prices and real estate prices within a short period of time.

(a) Which one of the following statements correctly predict the short run impact of the

increase in asset prices? (2 marks)

i. Consumption increases.

ii. Output increases.

iii. Exchange rate appreciates.

iv. Interest rate increases.

v. All of the above statements are true.

(b) Giving a brief explanation for your answer to part (a), and illustrate your explanation

with appropriate diagrams. (12 marks)

(c) Holding everything else constant, how will this increase in asset prices affect real

output in the long run? Provide a brief justification for your answer. (2 marks)