C: Short-run impacts of fiscal policy The economy of Wonderland has the following characteristics: C d = 100 + 0.5(Y T) 1000r I d = 400 1500r Md P = 0.5Y 2000(r + e ) e = 0 where Y is output, T is a lump-sum tax, G is government spending, r is the real rate of interest, P is the price level. Questions 19-28 relate to this information.

C2: Fiscal policy in a small open economy with flexible exchange rate. Now suppose Wonderland trades with one large open economy which has a price level of PF or = 200. The behaviour of Wonderland can still be represented by the equations in part C1. Plus its net exports follows NX = 50 0.1Y 50e where e is the real exchange rate. Questions 22-26 relate to this information

Q26. Which of the following does not describe the short-run equilibrium?

(a) The fiscal expansionary policy is effective in increasing the output.

(b) The increase in G crowds out net exports.

(c) The short-run NX = 200.

(d) The Keynesian and classical models would indicate the same result in this case.