Economics 470/570

Summer 1999

Final Exam

I. Short Answer.

Answer FIVE of the following six questions. Each question is worth 5 points.

1. Explain the difference between direct and indirect finance.

2. Explain the Monetarist view of aggregate demand.

3. What is the definition of the natural rate of output?

4. What is the federal funds rate?

5. What is the government budget constraint?

6. What is meant by the term crowding out?

II. Essay Questions.

Answer FIVE of the following six questions. Each question is worth 15 points.

1. Describe the structure of federal reserve districts and federal reserve banks. How has the power structure of the federal reserve system shifted over time?

2. Derive the short-run and long-run Phillip's curves from the AD-AS model.

3. Show that the pursuit of an interest rate target by the Fed results in monetization of the debt. What are the consequences of pursuing an interest rate target if the government consistently runs a budget deficit?

4. Derive the LM curve for the classical model. Use the IS-LM model to examine the relative effectiveness of monetary and fiscal policy in the classical model. Give an intuitive explanation of the result.

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. 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?