1. In the portfolio balance model, what effect, other factors constant, will a foreign government's budget deficit financed by issuing bonds have on the home country's curreny value and why?
2. Assume full employment,about purchasing power parity, and clearing money markets in two countries (country A and country B).
a. Derive the equation of exchange rate of the monetary approach to the exchange rate.
b. In (a), what is the effect on exchange rate of (i) an increase in money supply in country A and (ii) an increase in real income in country A?