Problem
1. One strong argument for a flexible exchange rate system is that it frees up monetary policy for use in pursuing domestic targets. Explain why this is so.
2. Why does monetary policy get a boost from the external sector under a flexible-rate system?
3. Suppose that policymakers decide to expand the economy by increasing the money supply. Based on the trade effects, who do you expect to favor such a policy? Who is likely to be against this policy? Why?