Week 6 - The Large Open Economy
This week we complete our study of the open economy. We extend the model of last week to two situations.
First we analyze the long run effects of policies in the open economy. We don't really add anything new to what we know about how the transition to the long run happens. As in the model of week 4, the adjustment to the long run equilibrium is determined by prices, which are fixed in the short run but change in the long run. So this part should be just a reminder of things we already know.
Second we look at the large open economy. The model of the large open economy is explained in Mankiw's appendix. This model will not be required for the final exam, but it would be useful for you to look at it. The model basically shows that the qualitative conclusions we reached in our closed economy apply to the large open economy. The difference is that the magnitude of the effects are different due to the effect of capital in-flows. The large open economy is a mixture of the closed economy and the small open economy. Effects of fiscal and monetary policies are somewhere in the middle.
To Do:
- Review each section one at a time and in order. You should do the readings, then watch the videos and then complete the practice problems.
- Next, ask questions on the Week 6 discussion board.
- Complete the quiz.
- Do the problems from Problem Set 3 Download Problem Set 3 related to this section.