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You have to write an “exam” question in which you would provide the setting or scenario and then using the Business Cycle Model, the “students” would have to analyze and predict the outcome of the situation.
Your “exam” question most come with an “answer key” with graphs that illustrate the economy’s dynamics.
Here is a sketch of the exercise.
- The economy starts at the steady state
- Then event ‘X’ happens (event ‘X’ can be anything that shifts C, I, G, or net exports)
- Illustrate how the economy moves to a new short-term position.
- Illustrate how the economy transitions to its new equilibrium in the middle-run
- Illustrate the economy’s end position in the long-run
- For each of these phases you have to tell what happens to: C, I, G, net exports, inflation, interest rates, and to the exchange rate.
Your “answer key” shall show in clean fashion all of the above.
Your “exam question” will count for 25 points, the “answer key” for 50, and the remaining 25 will be given for congruence between the graphs and your predictions.
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