ABSTRACT
The model of the previous chapter is now extended to the open economy and refined in a number of ways. The model is then used to address the general question of the effects on a small economy of temporary or permanent anticipated/unanticipated macro policy changes at home. We focus particularly on effects of anticipated policies which occur before the events take place (so called announcement effects). Our central concern is with the dynamics of adjustment, starting from an anticipated change to the point where full equilibrium is restored. Throughout we assume expectations are rationally formed.
