1. Due to limited borrowing options, the government may ask the central bank to print money. We also learned that the real seinorage revenue of the government depends on inflation and real money holding of the public, that is R= \prodM/P?.

a) Explain the circumstances under which of the following statement is true about money supply and reserve ratio?

b) Explain the circumstances under which the government cannot generate seinorage revenue by printing money. You must use diagrams to support your answer.

2. This question is regarding the effects of expansionary fiscal policy on domestic macroeconomic varaibles in an open economy. Suppose the country is initially in equilibrium at point E with the intersection of the IS curve, the LM curve, and the FE curve.

a) Explain how an increase in government spending will affect the IS, LM, and FE curves. Use a diagram to explain your answer. How will the following key macroeconomic variables be affected? Explain your answer using the diagram.

i. gross domestic product

ii. interest rates

iii. prices

iv. exchange rates

v. net exports

b) How the results are in an open economy different compare to the results in a closed economy?