325_PracticePS9

325_PracticePS9 - Department of Economics University of...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 9 Professor Sanjay Chugh Spring 2011 1. Consolidated Government Budget Constraint. Suppose that at the beginning of period t , M t -1 = 100 and the government has to repay 10 nominal units in government bonds (our usual one-period, FV = 1 bonds). In period t , the fiscal authority (Congress) decides to spend 190 nominal units in government spending, collect 180 nominal units in taxes, and instructs the Treasury to raise 20 nominal units by issuing new (one-period, FV = 1) bonds (that is, the Treasury is ordered to raise 20 nominal units by selling bonds, not ordered to sell 20 bonds). a. Under this scenario, can the monetary authority decide to expand the money supply (i.e., can it choose M t > M t -1 )? Briefly explain why or why not, or, if it is not possible to determine, explain why it cannot be determined. b. Under this scenario, is the monetary authority active or passive? Briefly explain. 2. Unpleasant Monetarist Arithmetic 1 . Consider a finite period economy, the final period of which is period T (so that there is no period 1 T ± ) – every agent in the economy knows that period T is the final period of the economy. In this economy, the government conducts both fiscal policy (engaging in government spending and collecting taxes) and monetary policy (expanding or contracting the money supply). The timing of fiscal policy and monetary policy will be described further below.
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325_PracticePS9 - Department of Economics University of...

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