ECON. 214: INTERMEDIATE MACROECONOMICS
OPEN ECONOMY APPLICATIONS
I.
1.  When East and West Germany unified in 1989, the government of West Germany increased its expenditure substantially.
Use the open economy model to predict the effects on the government's budget, net exports, real interest rates and the value of the (late) Deutsche Mark.

2.  During the 1980s, the U.S. government (and Ronald Reagan) cut income taxes and increased government expenditure.
Use the open economy model to predict the effects on the government's budget, real interest rates and the value of the U.S. dollar.

3.  If capital mobility across countries increases (i.e. less restrictions on flows of money from one country to another) would you expect the real interest rate differences (say, between U.S. and Germany) to widen or narrow?

II.
Look at the graphs in the Excel file :USGermanyData.xls and compare your predictions in (1), (2) and (3) to what actually happened.
Is the data consistent with your predictions?