Question 1

Outline a two-period model of consumption based on intertemporal behaviour.  Derive the  consumption function for your two-period model and determine the consequence of a fall in future income.

Question 2

Define and explain the following: (a) nominal price rigidity and (b) nominal wage rigidity.  Use diagrams to support your answer.  What are the implications of (a) and (b) for movements in the real wage over the business cycle?

Question 3

Suppose a country operates a fixed exchange rate system. Outline the implications for the macroeconomy of an expansionary fiscal policy using the Mundell-Fleming model. What is the role of capital mobility?