1. What factors determine the sensitivity of net exports to the interest rate?

2. Consider the cases where net exports are very sensitive to the interest rate and where they are very insensitive. Compare the effect that an increase in the money supply has on output, the interest rate, investment, and the trade balance for each case.

3. Suppose foreign manufacturers maintain a fixed dollar price for their goods regardless of the exchange rate. Does this result in net exports being more or less expensive to the interest rate?

4. Given this behavior, explain why the only way the monetary authorities could act to reduce the trade deficit is by introducing a recession.