Suppose prior to the coronavirus pandemic, the United States (U.S.) was in a long-run equilibrium initially with a floating exchange rate regime. The coronvirus pandemic caused many local businesses, shops, and restaurants to close, decreasing consumption demand for domestic goods and services temporarily.

a. (3 Points) Use the AA-DD-XX diagram to determine what happens to output, the spot exchange rate, and the current account in the U.S. as a result of the decrease in consumption, all else equal. Is the resulting equilibrium above or below the current account target?

b. (1 Points) What type of monetary policy can the Federal Reserve (i.e., U.S. central bank) engage to restore equilibrium output in the short run? Explain using the AA-DD-XX diagram.

c. (1 Points) What type of monetary policy can the Federal Reserve engage to meet the initial current account level in the short run? Explain using the AA-DD-XX diagram.

d. (5 Points) Returning to part a., assume that the overall decrease in consumption demand is the same, but now also assume that import demand decreases, but not as much as consumption demand. Use the AA-DD-XX diagram to determine how your answer would differ under this situation compared to part a. Is the resulting equilibrium above or below the current account target?