You may assume that there are open capital markets, and that prices are sticky in the short run but perfectly flexible in the long run. For full marks, be sure to label any diagrams clearly and completely.

6.Imagine a world made up of two large countries, Home and Foreign. Since both countries are large, neither can be thought of as facing a fixed external interest rate or a fixed level of foreign export demand.

a) What is the effect of a permanent monetary expansion by Home on Home and Foreign's output?

b) Imagine that the only causes of fluctuations in stock prices are unexpected permanent shifts in monetary policies. Under which exchange rate regime would the gains from international asset trade likely be greater, fixed or floating?