1. Analyze the effect of the following independent shocks on domestic Y and i in the Fleming-Mundell model. (10) a. The domestic economy experiences a fall in wages. The exchange

rate is fixed and capitalis imperfectly mobile. State the effect on domestic central bank reserves of foreign currency. (5) b. Domestic money demand falls. The exchange rate is floating and capital is perfectly mobile. (5) c. Foreign commercial banks decide to hold a higher fraction of each deposit on reserve. The exchange rate is fixed and capital is perfectly mobile. d. The foreign government lowers its spending. The exchange rate is fixed and capital is perfectly mobile. (10). e. Suppose the domestic economy is initially above Yn. With a diagram determine whether a fixed or floating exchange rate is superior for the shock in (d). Also state your finding in a sentence. f. (10) Domestic firms believe domestic consumption spending will fall. The exchange rate is floating and capital is imperfectly mobile. State the final effect on domestic investment. 2. Show the effects of the following independent shocks on the exchange rate in the foreign exchange market diagram. Assume the exchange rate is floating. (5) a. The domestic government finances major urban development in one of its inner cities by borrowing a vast amount from foreign investors. (5) b. For the shock in (a) state the effects on foreign net exports. (5) c. Floods destroy a large amount of the domestic capital stock. (5) d. Investors expect domestic interest rates to rise.