Economics 470/570
Summer 2003
Final Exam
Answer AT LEAST ONE QUESTION FROM SECTION I and FIVE QUESTIONS OVERALL (25
points each). Section I (answer at least one of these questions):
1. (a) How independent is the Fed? What factors contribute to independence? What factors work against independence? (b) Discuss arguments for and against the independence of the Fed.
2. (a) Describe the quantity theory approach to money demand. (b) Describe the Cambridge approach to money demand. How does the Cambridge theory differ from the quantity theory?
Section II (answer four of the following questions if you answered one
question in section I or three of the following questions if you answered two
questions in section I):
3. Suppose the monetary authority wants to reduce the inflation rate. Compare the costs (in terms of output) of reducing inflation in the traditional Keynesian, New Classical, and New Keynesian models. Be sure to cover both an expected and an unexpected change in policy.
4. Explain how the pursuit of a high employment target by policymakers can lead to inflation. Be sure to cover both cost push and demand pull inflation in your answer.
5. Explain why the IS curve is steeper when the sensitivity of investment to the interest rate falls. Use the IS-LM model to examine how the relative effectiveness of fiscal policy changes as investment becomes less sensitive to the interest rate. Explain the result intuitively.
6. Explain and give an example of the Lucas critique. Why is this important?
7. (a) 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. Why doesn't the Fed target output directly? (b) Explain Poole's rules.
