a. Use diagrams to show (i) a decline in aggregate supply AS, (ii) the resulting impact on the price level P and (iii) the impact on the exchange rate S. c. What is the difference between covered and uncovered interest arbitrage? A Canadian investor has to decide whether should invest in Canada or the UK. The interest rate is 2.3% in Canada and 3.4% in the UK. The exchange rate XCAD/1GBPis 1.33. Use the equation for the covered interest rate parity and calculate the forward rate. If uncovered interest parity did hold, what would be the expected future exchange rate? What would this imply for the expected change in the CAD/GBP exchange rate? The balance of payments summarises the economic transactions of the UK with the rest of the world. These transactions can be broken down into 3 main accounts: the current account, the capital account and the financial account. Briefly explain each main component. Using in small open economies.a diagram, explain how fiscal policy can be used to manage the exchange rate Consider a small open economy with a fixed exchange rate and limited capital mobility. The country has a large current account deficit. According to the Marshall-Lerner condition, what would be required for a devaluation to be successful? What do empirical studies say about the effects of a devaluation on trade balances?

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