Econ 100B Final exam questions, fall 2004
Prof. Olney
PART I.
QUESTIONS FROM THE LAST SECTION OF THE COURSE
(80 points total; about 60 minutes total)
Question 1 (40 points; 30 minutes)
Suppose the following equations describe the shortrun
economy.
C
=
350
+
0.8Y
D
T
=
–500
+
0.10Y
I
=
2,500

15,000r
G
=
2,000
GX
=
500

10,000r
IM
=
0.22Y
V
=
1,950
+
1,000i
B
e
=
2 percent
(0.02)
M
S
=
500
P
=
100
A)
(10 points) Suppose the Fed follows a money supply rule, setting the nominal money supply.
What is the equilibrium real interest rate and real GDP?
Put a box around your IS equation.
Put
a box around your LM equation.
Put a box around your final answer.
Show your work or no
points.
B)
(10 points) Now suppose the Fed decides to
increase the nominal money supply.
Explain the process by which the economy
adjusts to a new equilibrium price level,
real interest rate, and real GDP.
(This part
does not
use the numbers in part A.)
Supplement your explanation with a graph.
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View Full DocumentNow suppose instead
that the Fed follows a simple Taylor rule.
The C, T, I, G, GX, and IM equations
from page 1 still describe the economy.
In addition, the baseline or “normal” interest rate is 2 percent
(use 0.02), and the target inflation rate is 2 percent (use 0.02).
Whenever the actual inflation rate is 1
percentage point above the Fed’s target, the Fed raises the real interest rate by ½ percentage point.
Suppose further that the natural rate of unemployment is 4 percent and potential output is 10,500.
C)
(10 points) If the actual inflation rate is 2 percent, what unemployment rate will the Fed’s
monetary policy generate?
Show your work or no points.
D)
(6 points) Suppose instead that prices are not changing; prices are constant.
In this case, what
will unemployment be?
Show your work or no points.
E)
(4 points) Using the axes at right, draw the
monetary policy reaction function.
Using
your answers in parts (C) and (D), label two
points on the graph.
Question 2 (25 points; 19 minutes)
Suppose that the economy is initially in equilibrium in the short run
with the actual unemployment rate,
u
1
, equal to the natural rate of unemployment (u*) and also equal to the unemployment rate (u
0
) that is
generated when the Fed sets the real interest rate equal to the Fed’s notion of its baseline or “normal”
rate, r
0
.
In addition, the actual inflation rate
B
1
is equal to the Fed’s target inflation rate (
B
t
) which also
equals the expected inflation rate (
B
e
).
Suppose the Fed follows a simple Taylor rule when setting its
interest rate target.
A)
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 Fall '08
 Wood
 Inflation, Monetary Policy, Fed, baseline consumption

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