HARVARD UNIVERSITY

                      DEPARTMENT OF ECONOMICS

ECONOMICS 10b SPRING 2015

                        Problem Set #5

 (due TO YOUR SECTIONLEADER'S MAILBOX by 3 p.m. Friday, April 3rd)

1. Moldavia, an open economy initially in LR equilibrium, experiences the

   following two macroeconomic events:

         (i)    The Moldavian government cuts government spending and thereby
   
                reduces its budget deficit.
   
         (ii)   International financial markets begin to diversify their portfolios
   
                away from Moldavian assets.

   As a result of these two events, real interest rates in Moldavia do NOT change.

   Using a...