final-f2004

# final-f2004 - Econ 100B Final exam questions fall 2004 Prof...

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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 short-run 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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Now 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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final-f2004 - Econ 100B Final exam questions fall 2004 Prof...

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