PracticeMT#2solutions - Name Intermediate Macroeconomics...

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1 Name: Intermediate Macroeconomics Practice Midterm 2 Please put all papers away and breathe deeply. No calculators, no cell phones, no computers: nothing electronic is allowed. There are 50 points on the exam. Part 1: Definitions (2 points each) 1)Monetarism: If lags in monetary policy are long, then attempts to stabilize the economy using monetary policy may actually destabilize the economy. In this case, the optimal form of monetary policy is to have a constant growth rate of the money supply that does not respond to the business cycle. 2)Automatic Stabilizers: Fiscal policy tools which respond automatically to economic conditions, e.g. unemployment benefits.3)Information Lag: The time it takes for policymakers to acquire information about the current state of the economy. While some measures (like asset prices, e.g. stock prices and interest rates) are available immediately, 4)Monetary Neutrality: Notion that changes in the money supply have no effect on real variables but only affect nominal variables such as prices and wages. Our model predicts that monetary neutrality should hold in the long-run, but not the short-run. This prediction is consistent with what we observe after unexpected monetary policy changes in US data. 5)Taylor rule: A simple description of how monetary policy makers change interest rates in response to inflation and output changes. E.g. 𝑟𝑡= 𝑐 + φ𝜋𝜋𝑡+ 𝜑𝑥𝑥𝑡where φ𝜋and φ𝑥tell us how much the central bank changes real interest rates when inflation and output gaps change respectively.
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