8. Answer all parts (a)-(c) of this question. (a) [10 marks] Comment on the effectiveness of fiscal and monetary policy

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8. Answer all parts (a)-(c) of this question.
(a) [10 marks] Comment on the effectiveness of fiscal and
monetary policy in the Mundell- Fleming model for a small open
economy with perfect capital mobility. In your answer make sure to
distinguish between fixed and floating exchange rate regimes. Use
diagrams to illustrate your answer.
(b) [8 marks] A floating exchange rate is preferred to a
fixed exchange rate if the economy is hit by real shocks. Use a
diagram to critically assess that statement. How you answer would
change if prices in the economy are fully flexible?
(c) [7 marks] After the introduction of the Euro, the
nominal interest rates in the European countries joining the single
currency have converged to a similar level. A similar convergence
occurred in the rates of inflation of those countries. Provide an
economic explanation for those empirical facts.