You are the chief economic adviser in a small open economy with a floating-exchange-rate system. Your boss, the president of the country, wishes to increase the level of output in the short run in order to win re-election.
a) Do you recommend using expansionary or contractionary, monetary or fiscal policy? (Choose one) Use the Mundell-Fleming model to illustrate graphically your proposed policy and explain why you chose fiscal or monetary policy.
b) What if your country has a fixed exchange rate, what is the only policy mix that can be implemented? Explain why and show in Mundell model.