Final s2003 - FINAL EXAMINATION (Spring 2003) back to top...

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FINAL EXAMINATION (Spring 2003) back to top Question 1 (18 points total; 16 minutes total) For this question, assume inflationary expectations are static. Assume the Fed does not follow a “rule” in determining monetary policy. A) (10 points) In the early 1980s, the Fed had a money target. When the Fed has a money target, what effect does expansionary fiscal policy have on the economy in the short run with sticky prices? Explain the process by which the economy adjusts to a new equilibrium interest rate and output level after the implementation of expansionary fiscal policy. Supplement your answer with a graph. Label all curves, axes, and equilibrium points. B) (8 points) In the 1960s, the Fed had an interest rate target. When the Fed has an interest rate target, what effect does expansionary fiscal policy have on the economy in the short run with sticky prices? Explain the process by which the economy adjusts to a new equilibrium interest rate and output level after the implementation of expansionary fiscal policy. (You do not need to repeat the steps from your answer to part “A” which are the same in this part. But do indicate which steps are the same in parts “A” and “B.”) Supplement your answer with a graph. Label all curves, axes, and equilibrium points. 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.
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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)
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Final s2003 - FINAL EXAMINATION (Spring 2003) back to top...

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