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final-f2007 - Econ 100B Final exam questions fall 2007 Prof...

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Econ 100B Final exam questions, fall 2007 Prof. Olney (Part I was midterm 3 on Nov 29, 2007) PART II. QUESTIONS FROM ANY PART OF THE COURSE (65 points total; about 1 hour total) Question 1 (15 points total; 15 minutes total) a. (5 points) Robert Dye, senior economist at PNC Financial Services Group, said today, "If you take the stronger-than-expected economic data we saw this week in the form of retail sales and add to that the inflation data and then combine that with a somewhat ambiguous statement from the Fed, you get a picture as clear as mud" (http://biz.yahoo.com/ap/071214/wall_street.html). When everyone is uncertain about where the economy is heading, what happens to stock prices? Why? b. (5 points) Why does foreign saving respond to a change in our U.S. interest rates? Is your answer the same even if exchange rates are fixed rather than floating? Why? c. (5 points) You buy some land near the California-Oregon border for $100,000. What is the impact on GDP? Why? Question 2 (15 points; 15 minutes) Monetary policy of nearly all central banks in developed economies can be described by a Taylor rule of the form r = r 0 + r B ( B - B t ) - r u (u - u t ) Consider the following four scenarios. [A] Inflation is rising and unemployment is falling [B] Unemployment is rising and inflation is falling [C] Increased autonomous planned expenditures (A 0 ) occur at the same time as the productivity growth rate increases [D] Drops in autonomous planned expenditures (A 0 ) occur at the same time as inflationary expectations rise a. (10 points) For each scenario, what action would the central bank take? Explain. (Do not assume “crystal ball” rational expectations. You can assume static or adaptive expectations.) b. (5 points) Central bankers like some “fights” more than others.
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