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section 1

The country of Xenobia can be described as an open economy with a public sector.

a). Identify two methods of calculating gross domestic product (GDP) for this economy

b). Explain why the two methods you identified in part (a) must yield the same value of gross domestic product (GDP).

c) Assume that the economy of Xenobia is a full employment. Explain how an increase in net investment will affect each of the following.

i. Aggregate demand

ii. Long-run aggregate demand

iii. Output

Section 2

In your own macroeconomic lectures you are often told that exchange rate and interest rates are important for macroeconomics decision-making.

a) how does an increase in Japan's government budget deficit affect each of the following?

i. The real interest rate in short run in Japan. Explain

ii. Private domestic investment in plant and equipment in Japan.

b) Draw a correctly labelled graph of the foreign exchange market for euro, and show the effect of the change in real interest rate in Japan from part (a) (i) on each of the following.

i. Supply of euros. Explain

ii. Yen price of the euros. Explain

c) To reverse the change in the yen price of the euro identified in part (b) (ii), should the European Central Bank buy or sell euros in the foreign exchange market? Explain