Fall2015MT2 Solution - Name Solutions Economics 320L Fall...

This preview shows page 1 - 3 out of 6 pages.

1 Name: Solutions Economics 320L, Fall 2015 Midterm 2 Please put all papers away. No calculators, no cell phones, no computers: nothing electronic is allowed. The exam is scheduled for 80 minutes. There are 60 points total on the exam. Part 1: Definitions (3 points each) 1) Permanent Income Hypothesis: The idea that consumption responds strongly to permanent changes in income but only weakly to temporary changes in income. 2) Phillips curve: The negative relationship between inflation and unemployment, which used to be observed in the data. In our model, such a relationship exists, but shifts with expected inflation or changes in natural rate of unemployment u n . 3) Stagflation: Episodes of high unemployment and inflation. Particularly prevalent in the 1970s. 4) Monetarism: The notion that the optimal monetary policy is one with constant money growth rate, because lags in monetary policy are too long for it to be used effectively to stabilize the economy. 5) Inverted yield curve: The yield curve shows interest rates at different time horizons. When it is inverted, long- term rates are lower than short-term rates, which tends to predict downturns.
2 Part 2: Long Question on AS-AD Model (15 points) Comparative Statics of a Decrease in Money Technology (MT) Show what our AS-AD model predicts will happen to the variables in the table below in both the

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture