This exercise is aimed at assessing the response of different emerging markets to the global financial crisis in 2008.

a.Show, using the DD-AA model, how the global financial crisis affects the output of a small open economy that lets its exchange rate fluctuate freely (Hint: Think of the global financial crisis as a negative shock to investment, I).

b.Show, using the DD-AA model, how the global financial crisis affects the output of a small open economy that used official international reserves to stabilize its exchange rate (Hint: Use the same negative shock to I, and draw additionally the response of the Central Bank of letting the exchange rate depreciate but only mildly).

c.Compare the performance (in terms of output) during the global financial crisis for countries that use relatively more reserves to stabilize the exchange rate to countries that use relatively less reserves and let their domestic currency depreciate (Hint: Use the results from (a) and (b)).