1. Explain how and why monetary policy retains its effectiveness when there is a perfect mobility of capital.

2. If the price of pounds sterling rises in terms of Australian dollars, has the dollar appreciated or depreciated? What has happened to the pound?

3. Explain the purchasing power parity theory of the long run behavior of the exchange rate. Indicate whether there are any circumstances under which you would not expect the PPP to hold.

4. Your country is in recession. You feel that a policy of exchange rate depreciation will stimulate aggregate demand and bring the country out of recession. What can be done to trigger this depreciation?

5. What is the difference between depreciation and devaluation?