1consider an open economy with flexible exchange rates

Question

1.Consider an open economy with flexible exchange rates. Suppose output is at the natural level, but there is a trade de cit.

What is the appropriate fiscal and monetary policy mix?

2. In this chapter, we showed that a monetary expansion in an economy operating under flexible exchange rates leads to an increase in output and a depreciation of the domestic currency.

1. How does a monetary expansion (in an economy with flexible exchange rates) affect consumption and investment?
2. How does a monetary expansion (in an economy with flexible exchange rates) affect net exports?