Attempt all.

1.Derive the equation of IS curve in the open economy.

2. Within the Mundell-Fleming model assuming imperfect capital mobility, analyze the effects of the following policy actions for both the fixed and flexible exchange rate cases.

a. A decline in the money supply from M° to Mˡ.b. A decrease in Government spending from G° to Gˡ.

3. Consider the effects of a lump-sum tax cut, from T° to Tˡ, in a fixed exchange rate system. Consider both imperfect and perfect capital mobility. In which case will the tax cut have a larger effect on income?

4. According to the Solow model, how would each of the following affect consumption per worker in the long run (in the steady state)? Explain.

a. The destruction of a portion of the nation’s capital stock in a war.b. A permanent increase in energy prices.c. A permanent increase in the rate of immigration.d. A temporary rise in the saving rate.

5. Analyze the effects of an increase in the money supply within the Keynesian model where both the price level and money wage are assumed to be variable. Include in your answer the effects on the level of real income, the price level, the interest rate, and the money wage.

6. In a certain economy the expectations-augmented Phillips curve is

π=πe−2(u−u) where u=0.06a. Graph the Phillips curve of this economy for an expected inflation rate of 0.10. If the State Bank chooses to keep the actual inflation rate at 0.10, what will be the unemployment rate?