1. Using Fisher's condition compare the short and long run effects on the depreciation rate of the domestic currency for the following independent shocks. Expectations are adaptive.

a. Let velocity of circulation in the foreign economy fall then be constant at this new level. Domestic and foreign money growth rates are constant.

b. Let the domestic central bank reduce its money growth rate while foreign money growth is constant over time.

c. Let domestic government spending rise once then remain at this new level. Domestic and foreign money growth rates are constant.

d. For the shock in (b) use the UIRP condition to state the short run effect on the domestic nominal interest rate.

2. The foreign and domestic economies are initially at potential GDP. The domestic economy is small and the foreign economy is large. The exchange rate is floating and capital is perfectly mobile. Adjustment to shocks happens instantly. Using the AD-AS model analyze the long run impact on domestic X M, I, C, Y, P and E for the following shock:

a. The domestic economy is forced to use old capital technology which is less productive than current technology.

b. A rise in foreign consumption C*. Assume the exchange rate is floating.

3. Analyze the following statement explaining whether it is true, false or uncertain. Points are awarded for the quality of the explanation.

Plaza Accord policies did not eliminate the U.S. trade deficit completely because central bank intervention had unexpected effects on the U.S. dollar.