A macro-econometric model has been developed to explain the major characteristics of Korean economy. The model focuses on simulation for analyzing the impact of changes in monetary and fiscal policies and the foreign exogenous variables have on the key macro variables. For this purpose, the model is built as a simultaneous equation model, which comprises 45 behavioral equations, 25 identity equations, and 96 macro and financial variables. The sectors designed for mimicking the actual Korean economy are grouped as aggregate demand, aggregate supply, prices and interest rates, and labor. When the model is tested for stability, it shows that it can explain the real economy with high precision. The simulation is conducted to determine the response of the domestic economy to four factors, such as decreases in the US economic growth and world export, reduction of the level of the short-term interest rates, and expansion of government expenditure. The results from the simulations follow. First, decreases in the GDP of the US and world export weaken the real economy. Second, a rise in the Call rate weakens consumption and investment and the total economy. Third, an increase of government expenditure boosts real economy and price levels.

Kim Hyesun