1. Describe how, if at all, each of the following developments affects income, the exchange rate, and net exports in an open economy with floating exchange rates:

a. The discovery of new investment opportunities causes investment demand to be higher at a given interest rate than before.

b. The central bank changes its monetary policy rule so that it sets a lower real interest rate at a given level of output than before.

c. Foreign goods become more fashionable – that is, American demand for foreign goods at a given exchange rate increases.

d. Foreigners become more confident about America’s future. Specifically, the CF function changes so that CF is lower at a given r than before.

e. The demand for money decreases (that is, consumers’ preferences change so that at a given level of i and Y they want to hold fewer real balances than before).

2. Suppose the government wishes to lower the exchange rate, ε, but not to change real output, Y. What monetary or fiscal policy, or combination of the two, does it need to use to do this? Assume that exchange rates are floating.

3. Suppose that capital mobility increases (that is, that a given change in r has a larger impact on CF than before). Does this change increase, decrease, or not affect the power of monetary policy – that is, does it cause a given change in r to have a larger, smaller, or the same impact on Y than before? Assume that exchange rates are floating.