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    Use the AA-DD diagrammatic analysis to perform the following. Assume a flexible exchange rate regime. Label your graphs and your changes clearly.

    a)Compare the short-run impacts if a permanent increase in money supply versus a permanent tax cut. Keep in mind that a permanent policy alters people's expectations, which in turn shifts the AA curve.

    b)Compare the long-run impact of a permanent increase in money supply versus a permanent tax cut.

    c)What important exchange rate phenomenon underlies permanent policy changes that does not extend to temporary policy changes? Under which type of policy, monetary or fiscal, is this phenomenon responsible for accentuating the policy's short-run impact on income/output, and under which policy does it partially reverse the income/output impact?

    Other questions:

    b)What are the costs and benefits of fixed versus flexible international exchange rate systems? Looking over the last 80 years, which system do you think would work best in the future? Explain.

    c)What are the factors that determine an optimal currency union? Would the Canadian adoption of the U.S. dollar be optimal given these factors? Explain.

    d)Explain why both fiscal and monetary policy under a fixed exchange rate regime require the central bank to buy or sell foreign assets. Under what circumstances is there a role for monetary policy under a fixed exchange rate regime?

    e)Drawing the economic zones of discomfort, show the policy combination required to take an economy to internal and external balance if it is below full-employment with an excess current account surplus.

    f)Explain how international banking and the growth in global capital markets has enhanced the gains from trade, including an explanation of the different types of gains. What are the possible negative consequences of growth in these markets?

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