1. Suppose the government of a country wants to maintain full employment. There has been a rise in the demand for its products by foreigners. Using the DD-AA framework graphically show and discuss how the country can use monetary and fiscal policy to maintain full employment. Contrast and discuss the effect of the two policies on the nominal exchange rate.
2. Suppose there is a permanent fall in private aggregate demand for a country's output (a downward shift of the entire aggregate demand schedule). What is the effect on output? What government policy response would you recommend?
3. Why does a temporary increase in government spending cause the current account to fall by a smaller amount than does a permanent increase in government spending?