Comments on Final Exam questions

There is a correction in the wording in the parenthetical statement in problem #2. The change merely clarifies what you're still supposed to be considering as the initial shock: the decrease in consumption does not change.

2. Suppose there is a decrease in autonomous consumption spending (that is, there is a decrease in consumption spending that is NOT due to a decrease in income, rather they are more pessimistic about their future). What do you expect to happen to domestic interest rates? How does that differ from interest rates in the rest of the world? In order to restore equilibrium, explain what happens under fixed v. floating exchange rates?

Thanks Vanessa for calling that to my attention. It was a cut/paste/failure-to-edit mistake. My bad.

For 1 and 2, start with an economy in equilibrium with the rest of the world.

Also, in reference to the hints on the back. When reference is made to the bond market, that merely refers to the issue of capital flows. When IS or LM shift and it creates a domestic equilbrium that is off the BP curve, there will be a capital inflow or outflow. This will impact the fx market.