Economics 470/570
Winter 2003
Dr. Thoma
Final Exam
Answer EIGHT of the following questions (25 points each).
1. What is the Fisher equation? Explain the difference between the ex-ante real interest rate and the ex-post real interest rate.
2. Derive the short-run and long-run Phillip's curves from the AD-AS model. Use the Phillips Curve to examine the role of credibility in fighting inflation. Why might a government be willing to give up its credibility?
3. Explain why the IS curve is steeper when the sensitivity of investment to the interest rate falls. When is investment more sensitive to changes in the interest rate, at full employment or in a recession? Explain. 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.
4. Show that the Fed can control the monetary base better than it can control reserves. Can the Fed control the monetary base perfectly? Why or why not?
5. Derive the short-run and long-run supply curves under the assumption that the wage is fixed in the short-run. Show how the short-run AS curve shifts when the fixed wage increases.
6. Explain how the pursuit of a high employment target by policymakers can lead to inflation. Can budget deficits lead to inflation? Explain.
7. Describe the main function of financial markets. Explain how direct finance and indirect finance differ.
8. 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?
9. Show that the Fed cannot continuously hit both a money supply target and an interest rate target, i.e. that it must choose one or the other. Explain Poole's rules.
