Economics 470/570
Summer 1997
Final Exam
I. Short Answer. Answer FIVE of the following six questions. Each question is worth 5 points.
1. What is the natural rate hypothesis?
2. What is the credit view of the transmission mechanism?
3. What is the speculative demand for money?
4. Explain the multiple deposit creation process.
5. What are real business cycle models?
6. What is stabilization policy?
II. Essay Questions. Answer FIVE of the following six questions. Each question is worth 15 points.
1. Explain how the pursuit of a high employment target by policy makers can lead to inflation. Can budget deficits lead to inflation? Explain.
2. Derive the money multiplier when the public is allowed to hold currency and banks are allowed to hold excess reserves. Explain how the money multiplier changes when the required reserve ratio increases.
3. Examine the effects of anticipated and unanticipated changes in the money supply in the New Classical model. What is the policy ineffectiveness proposition? What assumptions are required to obtain the policy ineffectiveness proposition?
4. Explain why the IS curve is vertical when investment is unaffected by changes in the interest rate. Use the IS-LM model to show that fiscal policy becomes more effective relative to monetary policy as investment becomes less sensitive to the interest rate. Explain the result intuitively.
5. Explain the activist and non-activist positions on the use of government policy to stabilize macroeconomic variables such as real output. What problems are encountered in the pursuit of activist policies?
6. Derive the short-run and long-run supply curves under the assumption that wages are fixed in the short-run. Show how the short-run AS curve shifts if the fixed wage is higher. Is policy effective in this model?
