Zambia a small open economy with a flexible exchange rate. Recently the economy has been undergoing a number of difficulties resulting in massive job losses as a result of a slump in global economic growth. In addition, volatility in the domestic currency has increased considerably. Massive unemployment occasioned by recent job losses in the mining and allied sectors has prompted a debate among the citizens, with some advocating for expansionary fiscal policies others calling for an expansionary monetary policy.

Required:

A. Using the IS-LM-BOP model, provide an explanation for the impact of expansionary fiscal and monetary policies on output, exchange rate, consumption, interest and investment under the current exchange rate regime.

(10 Marks)

B. Assuming the Government yields to pressure and introduces a fixed exchange rate regime. Which of the two policies would have a greater impact? (10 Marks)

C. Explain the concept of the "impossible trinity". (5 Marks)

[TOTAL: 25 MARKS]