Problem
1. In a monetarist model of the balance of payments, assuming a fixed exchange rate and starting from equilibrium in all markets, how would Country A's balance of payments react to each of the following events:
(a) The central bank of Country A increases its domestic assets sufficiently to increase the stock of base money in the banking system by 10 percent.
(b) Central banks in the rest of the world increase their domestic assets sufficiently to increase the stock of base money in the banking system of the rest of the world by 10 percent.
(c) Because of a drought, GNP in the rest of the world declines by 10 percent.
2. Why is sterilization more difficult for a central bank when its country has a payments surplus than when it has a deficit?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.