True or False Instructions: Carefully read the following statements. Answer whether they are true or false and, if false, briefly justify (maximum 3 lines).

1. If a country pegs its exchange rate it always loses its independent monetary policy. 2. A decrease in the interest rate tends to cool down the economy through its effect on investment and consumption among others things. 3. If the policy rate is not at the zero lower bounds and the economy is hit by a supply shock, the Central Bank can easily achieve its targets. 4. It is always optimal for a government to decrease its debt-to-GDP ratio. 5. If the policy rate is at zero lower bounds, fiscal policy cannot be used to stimulate the economy. 6. Quantitative easing and forward guidance are two policies that are primarily used when the policy rate is at zero lower bounds. 7. The Global Financial Crisis was driven primarily by supply shocks. 8. Forward guidance is a policy that suffers from time inconsistency. 9. Having a negative current account is always bad.

10. There is a strong empirical link between monthly exchange rate changes and lagged interest rate dierentials (i.e. the theory of Uncovered Interest Rate Parity holds).