Core Macroeconomics, Hilary Term 2013

Week 6: The open economy II

This week we use the medium term model of a small open economy you studied last week to analyse shocks and policy responses. C&S Ch. 11 elaborates further on the model, while Ch. 17 offers some useful and interesting case studies, notably of the effects of German reunification on the ERM.


Carlin & Soskice Chapters 11, 17


Please write an essay answering the following questions.

a. Use the C&S model of a small open economy with flexible exchange rates to i) analyse the short- and medium-term effects of a negative shock to demand for the country's exports, and ii) assess the possibilities of mitigating the effects with fiscal and/or monetary policy.
b. Find data on the UK economy in recent years and evaluate whether the evidence is consistent with your analysis in (a).

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