Answer the following problems and draw the appropriate graph(s) if needed! 1.

What is the underlying assumption that makes economic explanation differs in the short-run and in the long-run? How could such assumption exist? (Why price is sticky in the short-run). What is the model that can be used to analyze economic fluctuation in the short-run? 2. For the past few years talks about cutting fuel subsidy have not been realized although oil price is high and Indonesia is no longer an oil-exporting country. a. By using Keynesian cross and investment function, explain the impact of cutting fuel subsidy to the IS curve! b. Explain by using the AD-AS model why the government of Indonesia may be reluctant to cut the fuel subsidy! 3. What will be the impact of these events to income, unemployment, interest rate, consumption and investment? (Use the IS-LM model) a. Suppose that there has been a rising risk of using credit card for the past few months because of credit-card fraud. As a result, people use less credit card and prefer to make transaction in cash instead. b. Suppose the public are becoming more aware of saving for retirement because of a best-selling book titled Retiring Rich. 4. Explain about the crowding-out effect of fiscal policy in Mundell-Fleming model with floating exchange rate! What is the difference between the crowding-out effect in Mundell-Fleming model and the closed economy model? 5. Explain the impacts of rising tariff on imported goods to income, exchange rate and net export under floating exchange rate system and fixed exchange rate system! Why the income does not change under floating exchange rate? Why is there a less trade because of such restriction under floating exchange rate?

*Deadline: Next weeks tutorial class (May 20, 2013)