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final-sp-03

final-sp-03 - F I NAL EXAM I NAT IO N(Spring 2003 Question...

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FINAL EXAMINATION (Spring 2003) Question 2 (14 points total; 12 minutes total) The MPRF/PC model captures changes in the unemployment and inflation rates in the short run when prices may be sticky. Suppose the central bank follows a rule that sets monetary policy in reaction to changes in the inflation rate. A) (8 points) On the demand-side of the economy, an increase in the inflation rate is associated with an increase in the unemployment rate. Explain why. (That is, explain why the MPRF slopes up.) B) (6 points) On the supply-side of the economy, an increase in the inflation rate is associated with a decrease in the unemployment rate. Explain why. (That is, explain why the PC slopes down.) Question 3 (10 points total; 9 minutes total) A) (5 points) Suppose that the advent of desktop publishing lowers menu costs. What effect does this change have on the Phillips Curve? Why? Using the axes at the right, draw the original Phillips Curve (PC1) and the new Phillips Curve (PC2). Label your axes. B) (5 points) Suppose instead that the productivity growth rate increases. What effect does this change have on the Phillips Curve? Why? Using the axes at the right, draw the original Phillips Curve (PC1) and the new Phillips Curve (PC2). Label your axes. Question 4 (12 points total; 9 minutes total) A) (2 points) In 1 or 2 sentences, explain what it means for the Fed to follow the simple Taylor rule: B) (5 points) Suppose the Fed follows the simple Taylor rule: . Suppose now the marginal propensity to consume, Cy,

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increases. Does the slope of the MPRF become steeper, flatter, or stay the same? Explain why. Supplement your answer with a graph. C) (5 points) Suppose the Fed follows the simple Taylor rule: . Suppose a new Fed chairman is elected, and he dislikes inflation less than the previous chairman did. Does the slope of the MPRF become steeper, flatter, or stay the same? Explain why. Supplement your answer with a graph.
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final-sp-03 - F I NAL EXAM I NAT IO N(Spring 2003 Question...

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