Problem
1. If a country finds itself experiencing stagflation under a flexible-rate system, why is expansionary monetary policy unlikely to cure the problem? Why are technological improvements or general productivity improvements so critical in this situation?
2. Suppose that a home country's currency is expected to depreciate in a flexible-rate system. Trace through the effects on home country AD, AS, prices, and income (output).
3. Suppose the economy is operating below its natural level of income (e.g., at point H in Figure 10). Would you recommend the use of expansionary policy in this instance? Why or why not?