1. Use a diagram to analyse the medium-term growth effects of the following situation. Assume: (1) Serbia's K/L was pushed below its long-term equilibrium by war damage to its capital stock, and (2) the EU signs a free trade agreement with Serbia that has two effects: (2a) it increases the efficiency of the Serbian economy (allocation effect), and (2b) it raises the Serbian investment rate (s) but only temporarily, for, say, ten years.

(i) Show what (1), (2a) and (2b) would look like;

(ii) show where the Serbian economy would end up in the long run (i.e. after s returned to its normal rate); and

(iii) show how the integration would affect Serbia's growth path.

2. Explain why the immigration of low-skilled workers can hurt native low-skilled workers and benefit high-skilled workers.

3. Using the IS-MP-IRP framework, examine the effects of an expansionary fiscal policy (e.g. an increase in public spending (G) under a fixed and under a flexible exchange rate regime.