1.

Considering the IS-LM model with expectations, give a detailed explanation of the
effects that a fiscal consolidation (contractive fiscal policy) has on the present levels of
production and consumption under two different scenarios: A) The fiscal policy is
perceived as transitory B) it is perceived as permanent. Is there any difference on the
level of consumption if the fiscal policy is carried out by changing public spending or
alternatively the level of taxes?

2. Consider a small open economy with perfect mobility of capital. The foreign interest
rate increases.
a. After this shock, how do the level of economic activity, consumption, investment,
and interest rate change, if the economy has a floating exchange rate regime? Explain
your answer considering that the expectations on the exchange rate do not change.
b. What is/are the difference/s if this economy has a fix and credible exchange rate
regime? Explain your answer considering that the expectations on the exchange rate
do not change.

3. How does the expected decrease in the level of economic activity due to the Brexit affect
the UK yield curve? How do you modify your answer if the UK Government announces
that, in order to mitigate the adverse effects of Brexit, it will implement an expansionary
fiscal policy in the future?

4. Consider a small open economy in which exist perfect mobility of capital. Financial
markets are in equilibrium, the domestic interest rate is higher than the foreign interest
rate, that is i > i*:
a. It is more profitable to invest in the domestic economy or to invest in the foreign
economy? Why? Explain in detail your answer.
b. Given that the financial markets are in equilibrium and there is a differential between
the domestic and foreign interest rates, what does the market expect about the future
evolution of the exchange rate? Explain your answer.