Economics 100B - 31 (05-08-07)

Economics 100B - 31 (05-08-07) - Economics 100B Professor...

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Economics 100B Professor Steven Wood 5/08/07 Lecture 31 ASUC Lecture Notes Online (formerly Black Lightning) is the only authorized note-taking service at UC Berkeley. Please do not share, copy or illegally distribute these notes. Our non-profit, student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. Sharing or copying these notes is illegal and could end note taking for this course LECTURE Today we will spend some time looking over some of the multiple-choice questions that have been on previous exams. It seems that people seem to do better on the free response questions rather than the multiple-choice sections. Remember, your final is on Friday at 12:30PM in 100 Haas Pavilion. We are testing in the front of the room (the direction that the chairs are facing). Don’t sit down to the Political Science exam! I will be having office hours on Thursday from 12:30PM to 3:30PM. For those of you who would like to come visit I am in F536 in the Haas School of Business. Multiple Choice Suppose we have a small open economy with perfect capital mobility and fixed exchange rates. If unemployment is below the NAIRU, then to stabilize the economy at potential output a good policy would be to: A) A fiscal policy contraction B) A monetary policy contraction C) A fiscal policy expansion D) A monetary policy expansion E) Indeterminate. Perfect capital mobility tells us we have a horizontal BP line. You need to memorize facts like these. Complete capital immobility means the BP curve is vertical etc etc. Fixed exchange rates force the central bank to intervene in the foreign exchange market to maintain the exchange rate. Monetary policy is not used for anything else. If we are below NAIRU that means output is above potential. In this case, if we are above potential and we want to be back at potential that we do not want an expansionary policy. This eliminates C and D right off the top. Now let’s think of this in terms of the IS-LM model: As long as we have non-sterilized foreign exchange intervention, there is no way we have independent monetary policy. This
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ASUC Lecture Notes Online Economics 100B 05/08/07 Sharing or copying these notes is illegal and could end note taking for this course 2 eliminates D. It cannot be indeterminate because we only have one option left. The answer is A; a fiscal policy contraction. In my multiple-choice questions, every piece of information needs to be used. This is not necessarily the case in my free-response questions. Suppose an economy with fixed exchange rates accumulates reserves of 100 last year. Then if the current account was 30, we know that: A) There was no sterilization B) The balance of payments was 70. C) The balance of payments was 30.
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Economics 100B - 31 (05-08-07) - Economics 100B Professor...

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