Economics 470/570
Summer 1998
Final Exam
I. Short Answer. Answer FIVE of the following six questions. Each question is worth 5 points.
1. What is the FOMC? Who is on the FOMC?
2. Compare rational and adaptive expectations.
3. What is the difference between the ex-ante and ex-post real interest rates?
4. What is the Lucas Supply Curve?
5. What is the government budget constraint?
6. What are real business cycle models?
II. Essay Questions. Answer FIVE of the following six questions. Each question is worth 15 points.
1. Describe the three tools available to the Fed for controlling the money supply. What are the advantages and disadvantages of each tool?
2. 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.
3. Derive the short-run and long-run supply curves under the assumption that price expectations are fixed in the short-run. Show how the short-run AS curve shifts when price expectations increase.
4. Explain how the pursuit of a high employment target by policy makers can lead to inflation. Can budget deficits lead to inflation? Explain.
5. Compare the effects of anticipated and unanticipated changes in the money supply on output and prices in the New Keynesian and New Classical models. What difficulties are encountered in pursuing stabilization policies in the New Keynesian model?
6. What are the three functions of money? Describe the problems that are overcome by the use of money. What properties must money satisfy in order to be useful?
