# Question

In the equilibrium small open-economy model, suppose that total factor productivity increases temporarily.

(a) If the exchange rate is flexible, determine the effects on aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price level.

(b) Repeat part (a) for the case of a fixed exchange rate. If the goal of the domestic government is to stabilize the price level, would it be preferable to have a fixed exchange rate or a flexible exchange rate regime when there is a change in total factor productivity?

(c) Now, suppose that under a flexible exchange rate regime, the domestic monetary authority controls the money supply so as to stabilize the price level when total factor productivity increases. Explain the differences between the outcome in this case and what happens in part (b) with a fixed exchange rate.

(a) If the exchange rate is flexible, determine the effects on aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price level.

(b) Repeat part (a) for the case of a fixed exchange rate. If the goal of the domestic government is to stabilize the price level, would it be preferable to have a fixed exchange rate or a flexible exchange rate regime when there is a change in total factor productivity?

(c) Now, suppose that under a flexible exchange rate regime, the domestic monetary authority controls the money supply so as to stabilize the price level when total factor productivity increases. Explain the differences between the outcome in this case and what happens in part (b) with a fixed exchange rate.

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