MACROECONOMICS PRACTICAL EXERCISES

Given the list of events:

a. People change their behavior and reduce their consumption and save more.
b. Business firms are pessimistic about future economic perspectives.
c. Government provides more attractive investment environment.
d. Government decreases its spending on education.
e. Government conducts expansionary fiscal policy.
f. Government conducts contractionary fiscal policy.
g. Government conducts expansionary monetary policy.
h. Government conducts contractionary monetary policy.
i. Government imposes tariff on imported goods.
j. More domestic residents prefer to consume foreign goods.
k. More foreigners prefer to consume domestic goods.

Question 1.
Consider a closed economy in the long run. For each of the events from (a) to (h),
explain what happens to the real interest rate and level of investment in the economy.
(Suggest: Use the loanable funds market for a closed economy)

Question 2.
Consider a small open economy with free capital mobility in the long run. For
each of the events from (a) to (k), explain what happens to the trade balance of the
economy.
(Suggest: Use the loanable funds market for a small open economy)

Question 3.
Consider a small open economy with free capital mobility in the long run. For
each of the events from (a) to (k), explain what happens to the real exchange rate and the
trade balance of the economy.
(Suggest: Use the foreign exchange market for a small open economy)

Question 4.
Consider a large open economy with free capital mobility in the long run. For each
of the events from (a) to (k), explain what happens to the economy’s real interest rate,
real exchange rate, trade balance and net foreign investment.
(Suggest: Use the large open economy three-panel diagram model)

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Question 5.
Consider a closed economy in the short run. For each of the events from (a) to (h),
explain what happens to the real interest rate, total output, consumption and investment
level in the economy.
(Suggest: Use IS-LM model)

Question 6.
Consider a closed economy in the short run. For each of the events from (a) to (h),
explain what happens to the price level, total output and unemployment in the economy.
(Suggest: Use AD-AS model)

Question 7.
Consider a small open economy with free capital mobility in the short run. For
each of the events from (a) to (k), explain what happens to the economy’s exchange rate,
total output, consumption and investment level under
a. the flexible exchange rate system
b. the fixed exchange rate system.
(Suggest: Use Mundell-Fleming model)

Question 8.
Consider a large open economy with free capital mobility in the short run. For
each of the events from (a) to (k), explain what happens to the economy’s real interest
rate, total output, consumption and investment level under
a. the flexible exchange rate system
b. the fixed exchange rate system.
(Suggest: Use IS-LM-BP model)

Question 9.
Assume an economy has the production function
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Y =K 0. 4 ( (1−u )L )
where Y is output; K is stock of capital, L is labor and u is unemployment rate.
a. Write the per-worker production function (i.e. y = f(k)).
b. Assume that each period the economy saves a fraction s of its output to make
investment in capital. Stock of capital depreciates at the rate of d. Population
grows at the rate of n. Derive the equation that describes the capital accumulation.
c. If s = 25%, d = 10%, n = 0.5% and u = 4%, what is the steady state capital stock
per worker, output per worker and consumption per worker?

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Question 10.
All the exercise (IS – LM) that the teacher gives at the class.