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Unformatted text preview: EC3332 Money and Banking I : Semester I, 2011-2012 National University of Singapore Mid-Term Test (Closed Book) : 30 September 2011 2 Question 1 is compulsory. Plan to spend not more than 15 minutes answering it. This question carries 10 marks. 2 Do any 2 out of the 3 remaining questions: All questions carry equal marks (25 marks each). 2 Explain your answers and illustrate them if this helps. 2 Time allowed for exam: 1:45 hours. 2 The diagrams are not in the solutions below. 1. Compulsory question: 10 Marks A recent quote by a monetary policy maker is given below (WSJ 8/9/2011) . Comment on it in light of recent events and what you have learnt in the course- that is how to make sense of what is beeing said. ”Monetary policy has little ability to help the U.S. jobs market in current eco- nomic circumstances, a top Federal Reserve official said Thursday. I am really doubtful that monetary policy is a tool that is going to help us very much to help spur demand and improve hiring in an economy where many households and companies are still looking to cut borrowing levels, rather than to increase them, Federal Reserve Bank of Philadelphia President Charles Plosser said in an interview with Dow Jones Newswires and The Wall Street Journal. Plosser said he sees a high bar to new Fed action. Broadly speaking, there are two things the Fed should respond to, he said. If there were some kind of financial crisis, like Europe, it would be appropriate for us to step in and be the lender of last resort. Also, if deflationary fears became a real threat again, that would be a justification for the Fed to step in again. I dont see either one of those happening, Plosser said. The veteran policy maker currently holds a voting role on the monetary policy- setting Federal Open Market Committee. He was one of three officials who mounted a remarkableand unseen in a generationformal dissent against the Au- gust decision to conditionally hold interest rates at very low levels until 2013.” Do any 2 of the following 3 questions . 2. Consider the standard overlapping generations model where each generation lives for two periods. The utility function of each future generation is given by u ( c 1 ,t ,c 2 ,t +1 ). The endowments when young and old are given by ( y, 0) where y > 0. Assume that there is no population growth so N t = N t- 1 . Assume there is a supply of fiat money, M t , in the economy which grows at rate z , that is M t = zM t- 1 . Assume that preferences are such that each person born in period t wants to hold real money balances equal to v t m t = y 1 + v t v t +1 . The government finances its expenditures which are equal to g units per old by seigniorage, that is by increasing money supply. (a) Write down the feasible set in this economy and graph it. [ 5 marks ] The feasible set is: c 1 ,t + 1 n c 2 ,t +1 + g n = y....
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This note was uploaded on 01/30/2012 for the course ECON 121 taught by Professor Abi during the Spring '11 term at Abu Dhabi University.
- Spring '11