1. Now assume that Taiwan is a small open economy. If the Central Bank wishes to stimulate the economy by printing money, the trade balance will ___, the interest rate will ___, and the exchange rate will ___.

2. According to the Fisher model, if Joe wishes to consume more than his current income in Period 1, when the real interest rate increases, the income effect works to ___ consumption in Period 1, and ___ consumption in Period 2; the substitution effect works to ___consumption in Period 1, and ___ consumption in Period 2.

3. Assume that a large open economy with a floating exchange rate is described in the short run by the equations: C = 0.5(Y - T) T = 1000 I = 1500 - 250r G = 1100 NX = 1000 - 250e M/P = 0.5Y - 500r M = 1000, P = 1 CF = 500 - 250r CF denotes net capital outflow, and NX denotes the net exports. The short-run equilibrium values of Y=___, C =___, r =___, I =___, CF =___, e =___, and NX =___. If the government cuts T to 600, then the short-run equilibrium values of Y =___, C =___, r =___, I =___, CF =___, e =___, and NX =___. According to above results, when the government cuts taxes, the real interest rate will ___ and the exchange rate will ___.

4. In the Solow model with technological progress, suppose that two countries are exactly alike in every respect except that country A has larger population than country B. Then country A has ___level of total output, ___ level of output per worker, ___ level of output per effective worker, the ___ rate of growth of output per worker, and the ___ rate of growth of output than country B.

5. From 1960 to 2007, Europe had higher rate of unemployment than the United States, there are two main reasons, one is ___ , and the other is ___.

(a) What is the intensive-form production function f(k), where k= K/AL denotes capital per effective labor? (5%)

(b) Solve for the steady-state value of capital per effective labor (k*) as a function of capital share (), saving rate (s), population growth rate (n), technology progress rate (g) and capital depreciate rate (δ). (5%)

(c) Illustrate the meaning of golden rule in a plausible diagram. (5%)

(d) What policies might the low-developed country pursue to raise its level of income? (5%)

(a) Describe the short-run impact of the adverse supply shock on the level of prices and output in each country. (10%)

(b) Compare the long-run impact of the adverse supply shock on the level of prices and output in each country. (10%)

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