Impact of Consumer Confidence on Open Economy and Policy Mix

This report analyzes the impact of a decrease in consumer confidence on an open economy, using the IS-LM model. It examines the effects on interest rates, consumption, investment, the real exchange rate, and net exports, with graphical illustrations. The report then discusses appropriate monetary-fiscal policy mixes to address the recession, considering the current low-interest-rate environment, and analyzes the effects of these policies on interest rates, consumption, investment, the real exchange rate, and the budget and trade balances, again with graphical representations. Finally, the report investigates a European country's experience with a liquidity trap, evaluating the effectiveness of fiscal and monetary policies in overcoming the recession and their impact on trade and budget deficits. This analysis provides a comprehensive understanding of macroeconomic principles and policy responses.

EC2002 Macroeconomic Principles II Dr Sanna Nurmikko-Metsola
Autumn term 2016
Coursework assignment
Consider an open economy with flexible exchange rates. Suppose that as a result
of a decrease in consumer confidence, there is a decrease in total demand, and,
consequently, a decrease in equilibrium output. Using an open economy IS-LM
model, explain the short-run effects of a fall in consumer confidence on the
interest rate, consumption, investment, the real exchange rate and net exports.
Illustrate your answer using graphs.
Keeping in mind that the current economic climate is characterised by very low
interest rates, what would be the appropriate monetary-fiscal policy mix to help
the economy recover from recession? Discuss the effects of the policy mix on the
interest rate, consumption, investment and the real exchange rate. Explain the
impact that the policy mix will have on the budget and trade balances. Illustrate
your answer using graphs.
Find, collect, present and analyse data from a European country that has been in
a liquidity trap and discuss to what extent the fiscal and monetary policies have
been successful in getting the economy out of recession as well as the impact of
the policies on the country’s trade and budget deficits.
Deadline for submission: Wednesday 14th December 2016 at 12noon.
Please see ‘Coursework Assignment_General guidelines.docx’ (available on the
module’s BBL page) for detailed instructions.