MACROECONOMICS PRACTICAL EXERCISES

Submission of Individual Assignments 2 and 3

Given the list of events:
a. People change their behavior reduce their consumption and save more.
b. Business firms are pessimistic about future economic perspectives.
c. Government provides a 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 a tariff on imported goods.
j. More domestic residents prefer to consume foreign goods.
k. More foreigners prefer to consume domestic goods.

Assignment 2:
Question 1. Consider a closed economy in the long run. For each event from (a) to (h),
explain what happens to the real interest rate and level of investment in the economy.
Answer:
(a) and (b): (a) When people reduce their consumption, their level of investment in their
standard of living will be lower, and more savings will increase the supply of
loanable funds. Similar to case (b), when business enterprises are pessimistic about
future economic prospects, they will reduce investment levels and unused loan
capital will cause excess supply. Both cases will not affect inflation but will cause
real interest rates to decrease.
(b)

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)

Assignment 3:
Question 1. 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)
1

Question 2. 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 3. 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 4. 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)
2