Use the AA -DD framework to answer the following questions (with figures) Assume you are starting from a full employment equilibrium.

a) There is a an outbreak of war in the main trading partner of the country ( ie the leading export destination of the countries products). This results in a temporary disruption of trade between the two countries. ( assume other countries are insignificant) What is the impact on the DD and AA curves.

b) Why is the outcome in a) not desirable? Which policy (monetary or fiscal) would be more appropriate to improve the situation. Explain your choice clearly using figures).

c) Now suppose that instead of a war, there is a financial crisis in the foreign country which leads investors to revise their expectations of the future exchange downwards (Ee falls). What is the impact on the AA and DD curves.

d) Why is the outcome in b) not desirable? Which policy (monetary or fiscal) would be more appropriate to improve this situation. Explain your choice clearly using figures.