Economics 100B
Midterm #3 Questions
Fall 2007
100 points, 80 minutes, 20% of grade
Question 1 (10 points total; 7 minutes total)
a.
(6 points)
Explain why the Fed lowers interest rates when the inflation rate falls.
Be
complete.
b.
(4 points)
Explain why unemployment is expected to rise when real GDP grows by just 1%
per year.
Question 2 (20 points total; 15 minutes total)
Suppose the following equations describe the economy.
MPRF: u = 0.02 + 3(
B
 0.03)
PC:
B
= 0.02  0.5(u  0.04)
a.
(3 points)
What is the expected inflation rate?
What is the Fed’s target inflation rate?
What is the natural rate of unemployment?
b.
(7 points)
Solve for the equilibrium values of unemployment and inflation rates.
If you can’t solve
this without a calculator (tsk tsk), set it up and go as far as you can to get as much partial
credit as possible.
c.
(5 points)
If expectations are adaptive
, what is the equation for the Phillips Curve in the next
period?
Explain how you came to this answer.
d.
(5 points)
If instead expectations are rational
, what is the equation for the Phillips Curve in the
next period?
Explain how you came to this answer.
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 Fall '08
 Wood
 Macroeconomics, Inflation, Interest Rates, Monetary Policy, Inflation rates

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