Problem Set 70-3

1. Suppose a country with floating exchange rates has a current account deficit which its government considers is too large.

A. Use a AA-DD diagram to show how monetary policy could be used to reduce the current account deficit. Does this action help or hinder its goal of maintaining low unemployment?

B. Use a AA-DD diagram to show how fiscal policy could be used to reduce the current account deficit. Does this action help or hinder its goal of maintaining low unemployment?