Economics 470/570 - Monetary Theory and Policy

FedStuff: Santomero to Step Down, Auto Parts, Education, and ATMs

From the Philadelphia Fed web site:

Philadelphia Fed President to Leave Bank Next Year: Anthony M. Santomero, president of the Federal Reserve Bank of Philadelphia, announced that he will leave his position as president effective March 31, 2006 . Dr. Santomero has headed the Philadelphia Fed for nearly six years, and is completing his year as a voting member of the Federal Open Market Committee. “... The president’s choice of Ben Bernanke is an excellent one, and the Federal Reserve is in good hands. However, if I am to move on to one more new career, now is the opportune time to make the transition,” Santomero said. ...

And, as Bloomberg notes, Sanotmero was an advocate of explicit inflation targeting so his departure may change the degree of support for moving in this direction depending, of course, on the views of his replacement, and he is also relatively hawkish on inflation:

Santomero, Philadelphia Fed Bank President, to Step Down on March 31, Bloomberg: Federal Reserve Bank of Philadelphia President Anthony Santomero will leave his job March 31 ... The departure means Ben S. Bernanke ... will lose an ally in his effort to set a specific U.S. inflation target. ... "Santomero was an important supporter of inflation targeting,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. ... Santomero stressed the need for the Fed to raise rates to contain inflation in speeches this year. "It is incumbent upon the Fed to make every effort to keep these price pressures well- contained,'' he said in June remarks in Washington. ... "He took a consistently hard stance against inflation,'' said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. ... Of the 12 regional Fed presidents, Santomero is among the six who support creating some form of a numerical description of the Fed's low-inflation mandate. Bernanke backs the idea ...

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From the Chicago Fed:

Chicago Fed Letter A newsletter featuring an essay on economic policy issues of regional or national interest. January 2006

Competition and trade in the U.S. auto parts sector by Thomas H. Klier and James M. Rubenstein: Exports of U.S. made auto parts have stalled in recent years, while import levels of auto parts have continued to increase. The authors detail the magnitude and destination of U.S. imports and exports of specific auto parts in order to assess the challenges facing U.S. parts suppliers. (PDF,106KB)

Higher education and economic growth by Richard H. Mattoon: The future of higher education and its relationship to economic growth were the focus of a one-day conference at the Chicago Fed on November 2, 2005. Cosponsored by the bank, the Committee on Institutional Cooperation, and the Midwestern Higher Education Compact, the event brought together over 100 academic, business, and government leaders. (PDF,48KB)

Higher education and economic growth: A conference report by Richard H. Mattoon: This is an expanded summary of the conference on higher education that was held at the Federal Reserve Bank of Chicago on November 2, 2005. This edition is only available online. (PDF,69KB)

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From the San Francisco Fed:

FRBSF Economic Letter

Bank ATMs and ATM Surcharges This Letter reports on recent research into the proliferation of ATMs and the pricing schemes that accompany them, which sheds some light on how banks compete against each other in the current environment. — Gautam Gowrisankaran & John Krainer, Economic Letter 2005-36 (December 16)

Midterm

Economics 470/570
Spring 2004
Midterm

Part I - Definitions. Define each of the following (3 points each, 30 points total).

1. Discount rate

2. Open market operation

3. LM curve

4. Non-borrowed reserves

5. Velocity

6. Transactions demand for money

7. Partially backed paper money

8. Bank Reserves

9. Autonomous expenditures

10. Liquidity

Part II - Short Answer. Answer THREE of the following questions (8 points each, 24 points total).

1. What properties must money satisfy in order to be useful?

2. Who is on the FOMC? What does the FOMC do?

3. Explain why the demand curve for reserves slopes downward.

4. Derive the LM curve graphically and explain intuitively why the LM curve slopes upward.

Part III – Essays and problems. Answer THREE of the following questions (15 points each, 45 points total)

1. How independent is the Fed? What factors contribute to independence? What factors work against independence? Discuss arguments for and against the independence of the Fed.

2. Explain intuitively and show graphically how the quantity of reserves and the FF rate are affected by (a) open-market operations, (b) discount loans, and (c) changes in reserve requirements.

3. According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important?

4. (a) Show that a decrease in taxes causes the IS curve to shift out using a 45 degree line diagram and an IS curve diagram. (b) Show graphically and explain intuitively how the slope of the IS curve changes when the responsiveness of investment to the interest rate (I_i) increases. A detailed mathematical answer can be substituted for the graphical analysis.

Midterm

Economics 470/570
Summer 2003
Midterm

Answer FIVE of the following six questions (20 points each). Put a large X on the page of the question you are omitting so as to clearly and unambiguously designate the skipped question.

1. (a) Derive the LM curve graphically. Explain intuitively why it slopes upward. (b) Consider points above or below the LM curve. Explain why there is excess demand or excess supply at each point and the forces that cause the interest rate to change so as to restore equilibrium.

2. According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important?

3. Describe the three tools available to the Fed for controlling the money supply. Using T-accounts show that the Fed can increase the monetary base by (a) making discount loans to banks, (b) an open market purchase of government bonds from banks, or (c) an open market purchase of government bonds from an individual.

4. Describe the structure and function of the Board of Governors of the Federal Reserve System. What is the FOMC? What does it do?

5. What are the functions of money? Relative to a barter economy, what problems are overcome by the use of money? What properties must money satisfy in order to be useful?

6. 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?

Midterm

Economics 470/570
Winter 2003
Dr. Thoma
Midterm

Answer each of the following questions (20 points each).

1. Discuss the transactions, precautionary, and speculative motives for holding money in Keynes liquidity preference theory. When all three motives are put together, what theory of money demand emerges?

2. What are the functions of money? Relative to a barter economy, what problems are overcome by the use of money? What properties must money satisfy in order to be useful?

3. 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 (a) the required reserve ratio increases, (b) the currency to deposit ratio increases, and (c) the excess reserve to deposit ratio increases. What factors determine the quantity of excess reserves held by banks?

4. How independent is the Fed? What factors contribute to independence? What factors work against independence? Discuss arguments for and against the independence of the Fed.

5. Explain why the demand curve for reserves slopes downward. Explain why the supply curve for reserves slopes upward. Explain how the quantity of reserves and the FF rate are affected by (a) open-market operations, (b) discount loans, and (c) changes in reserve requirements.

Midterm

Economics 470/570
Spring 2000
Midterm

I. Short Answer: Answer four of the following five questions. Each question is worth 8 points.

1. What are the three types of financial intermediaries? Give an example of each type.

2. Suppose that the excess reserve to deposit ratio increases. Explain how this will affect the money supply.

3. What is the federal funds rate?

4. Explain why the price of bonds and the interest rate are inversely related.

5. Explain the difference between direct and indirect finance.

II. Essay Questions: Answer each of the following four questions. Each question is worth 17 points.

1. How independent is the Fed? What factors contribute to the independence of the Fed? What factors work against independence? Discuss the arguments for and against the independence of the Fed.

2. Discuss the transactions, precautionary, and speculative motives for holding money in Keynes liquidity preference theory. When all three motives are put together, what theory of money demand results?

3. When using open-market operations, does the Fed have better control over the monetary base or bank reserves? Explain. Why can't the Fed control the money supply perfectly?

4. Discuss the evolution of the payments system from barter to fiat money. How did banking arise?

Midterm

Economics 470/570
Summer 1999
Midterm

I. Short Answer: Answer five of the following seven questions. Each question is worth 8 points.

1. What is the Fisher equation? Does it describe the ex-ante or ex-post real interest rate?

2. Why is currency in circulation listed as a liability on the Federal Reserve's balance sheet?

3. What are secondary markets? Why are they important? Give two examples of secondary markets for financial assets.

4. Explain intuitively why the IS curve slopes downward.

5. How reliable are data on the money supply?

6. What are non-borrowed reserves? How well can they be controlled by the Fed?

7. Suppose that the required reserve ratio is 15%, the currency to deposit ratio is .20, the excess reserve to deposit ratio is .05, and the monetary base is 20,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 200. Use the money multiplier to find the new value of the money supply.

II. Essay Questions: Answer four of the following five questions. Each question is worth 15 points.

1. 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?

2. Using T-accounts, show that the Fed can increase bank reserves by making discount loans to banks, by purchasing government bonds from banks, or by purchasing government bonds from individuals. Explain intuitively how the creation of reserves leads to multiple deposit creation in banks.

3. Describe the structure and function of the Board of Governors of the Federal Reserve System. What role does the Board of Governors play on the FOMC?

4. According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important?

5. Describe the three tools available to the Fed for controlling the money supply. What are the advantages and disadvantages of each tool?

Midterm

Economics 470/570
Summer 1998
Midterm

I. Short Answer. Answer five of the following seven questions. Each question is worth 8 points.

1. What is the federal funds rate?

2. Explain intuitively why the LM curve is positively sloped.

3. What are the three types of financial intermediaries? Give an example of each type.

4. How is M1 defined? Why might this definition be too narrow?

5. Explain the difference between direct and indirect finance.

6. What is the discount window and the discount rate? Who sets the discount rate?

7. Suppose that the currency to deposit ratio increases. Explain how this will affect the money supply.

II. Essay Questions. Answer four of the following five questions. Each question is worth 15 points.

1. How independent is the Fed? What factors contribute to the independence of the Fed? What factors work against independence? Discuss the arguments for and against the independence of the Fed.

2. Describe the Quantity Theory and Cambridge approaches to money demand. In what sense did Keynes follow in the Cambridge tradition? What did Baumol add?

3. Explain how financial intermediaries bring about more efficient use of financial resources.

4. 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?

5. 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?

Midterm

Economics 470/570
Summer 1997
Midterm

I. Short Answer. Answer five of the following seven questions. Each question is worth 8 points.

1. How do bonds and equities differ? Which is more risky?

2. Explain intuitively why the IS curve is negatively sloped.

3. What defines a capital market instrument? Describe two capital market instruments.

4. What is the expenditure multiplier? Why is it useful?

5. Explain the difference between direct and indirect finance.

6. How is the monetary base defined? What are excess reserves?

7. Suppose that the required reserve ratio is 25%, the currency to deposit ratio is .10, the excess reserve to deposit ratio is .20, and the monetary base is 5,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 500. Use the money multiplier to find the new value of the money supply.

II. Essay Questions. Answer four of the following five 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. According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important?

3. Derive the LM curve. Show graphically and explain intuitively how an increase in the money supply affects income and the interest rate in the IS-LM model.

4. How do financial intermediaries, through their ability to pool resources and economize on transactions costs, promote more efficient use of financial resources?

5. Show that the Fed can control the monetary base better than it can control reserves. How does the Fed use the monetary base to control the money supply?

Midterm

Economics 470/570
Summer 1996
Midterm

I. Short Answer.

Answer five of the following seven questions. Each question is worth 8 points.

1. How do money and capital markets differ? List two money market instruments and two capital market instruments.

2. What is the definition of the monetary base? What are non-borrowed reserves?

3. What is the discount window and the discount rate? Who sets the discount

rate?

4. What is the Fisher equation? Does it define the ex-ante or the ex-post real rate of interest?

5. What is the speculative demand for money?

6. What are the three types of financial intermediaries? Give an example of each type.

7. Suppose that the required reserve ratio is 10%, the currency to deposit ratio is .25, the excess reserve to deposit ratio is .15, and the monetary base is 1,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 100. Use the money multiplier to find the new value of the money supply.

II. Essay Questions. Answer four of the following five 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. Discuss the evolution of the payments system from barter to fiat money. How did banking arise?

3. What are the reasons for regulating financial markets? Discuss the types of regulations that have been imposed on financial markets.

4. Describe the Quantity Theory and Cambridge approaches to money demand. In what sense did Keynes follow in the Cambridge tradition? What did Baumol add?

5. How has the power structure of the Federal Reserve system shifted over time?

Midterm

Economics 470/570
Summer 1995
Midterm

I. Short Answer. Answer five of the following seven questions. Each question is worth 8 points.

1. What is the announcement effect?

2. What is the federal funds rate?

3. Define the transactions demand for money.

4. What is the difference between the ex-ante and ex-post real interest rates?

5. What is the theoretical definition of money?

6. What is the FOMC? Who is on the FOMC?

7. Suppose that the required reserve ratio is 8%, the currency to deposit ratio is .20, the excess reserve to deposit ratio is .02, and the monetary base is 5,000. (a) Find the money supply. (b) Let open market operations increase the monetary base by 100. Use the money multiplier to find the new value of the money supply.

II. Essay Questions. Answer four of the following five questions. Each question is worth 15 points.

1. 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?

2. When using open-market operations, does the Fed have better control over the monetary base or bank reserves? Explain. Why can't the Fed control the money supply perfectly?

3. What are financial intermediaries? How do they promote the efficient use of financial resources?

4. How independent is the Fed? What factors contribute to the independence of the Fed? What factors work against independence? Discuss the arguments for and against the independence of the Fed.

5. Discuss the contributions of the Cambridge economists and Keynes to the theory of money demand.

Final Exam

Economics 470/570
Spring 2004
Final Exam

Part I - Definitions. Define EACH of the following (4 points each, 40 points total).

1. Crowding out

2. Speculative demand for money

3. Potential output

4. Rational expectations

5. Debt monetization

6. Direct and indirect finance

7. Excess reserves

8. Policy ineffectiveness proposition

9. Recognition lag

10. Short-run and long-run in AD/AS model

Part II - Short Answer. Answer FOUR of the following questions (15 points each, 60 points total).

1. Is the economy self-correcting? Explain.

2. Derive the aggregate demand curve from the IS-LM model and explain intuitively why it slopes downward. What makes the AD curve steeper or flatter?

3. Using T-accounts show that the Fed can increase the monetary base by (a) an open market purchase of government bonds from banks, or (b) an open market purchase of government bonds from an individual.

4. Show that it is possible in a model with expectations (e.g. using the New Classical model) for an increase in the money supply to reduce output if the change in the money supply is smaller than expected.

5. Explain the shape of the supply curve for reserves.

Part III – Essays and problems. Answer FIVE of the following questions (20 points each, 100 points total)

1. 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?

2. Describe the structure and function of the Board of Governors of the Federal Reserve System. How has the power structure of the Federal Reserve System shifted over time?

3. Can budget deficits lead to inflation? Explain. Why might governments choose to monetize the debt?

4. (a) Explain intuitively how the money multiplier changes when (i) the required reserve ratio increases, (ii) the currency to deposit ratio increases, and (iii) the excess reserve to deposit ratio increases. What factors determine the quantity of excess reserves held by banks? (b) Explain how the money supply changes when discount loans increase. What might cause discount loans to change?

5. Use the IS-LM model to examine how the relative effectiveness of monetary and fiscal policy changes as investment becomes less sensitive to the interest rate. Explain the result intuitively.

6. (a) Compare and contrast the effects of an unexpected increase in the money supply on prices and output in the New Classical and New Keynesian models. (b) Compare and contrast the effects of an expected increase in the money supply on prices and output in the New Classical and New Keynesian models.

Final Exam

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.

Final Exam

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.

Final Exam

Economics 470/570
Summer 2000
Final Exam

I. Short Answer.

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

1. Discuss two properties that money must satisfy in order to be useful as a medium of exchange.

2. What is the definition of the monetary base? What are non-borrowed reserves?

3. What is debt monetization?

4. Explain the policy ineffectiveness proposition.

5. What factors affect the natural rate of output?

6. What is the credit view of the transmission mechanism?

II. Essay Questions.

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

1. Examine the effects of anti-inflation policies on inflation and output in the traditional Keynesian, New Classical, and New Keynesian models.

2. 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. What does this tell us about the use of monetary policy in recessions?

3. Do Monetarists and Keynesians believe that inflation is always and everywhere a monetary phenomena? Explain.

4. According to Baumol and Tobin, the transactions demand for money depends upon the interest rate as well as nominal income. Explain why the transactions demand for money depends upon the interest rate. Why is this important?

5. Explain the Lucas critique of econometric policy evaluation.

Final Exam

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?

Final Exam

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?

Final Exam

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?

Final Exam

Economics 470/570
Summer 1996
Final Exam

I. Short Answer.

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

1. What is the natural rate of unemployment?

2. Define and explain the velocity of money.

3. What is the Lucas supply curve?

4. What are adaptive expectations?

5. What is debt monetization?

6. What is the policy ineffectiveness proposition?

II. Essay Questions.

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

1. 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?

2. 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.

3. Do Monetarists and Keynesians agree with Friedman's contention that inflation is always and everywhere a monetary phenomena? Explain.

4. Examine the effects of anti-inflation policies on output and prices in the traditional, New Classical, and New Keynesian models.

5. Discuss the transactions, precautionary, and speculative motives for holding money in Keynes liquidity preference theory. When all three motives are put together, what theory of money demand results?

6. Explain the Monetarist and Keynesian views of aggregate demand. Explain why Monetarists do not believe that shifts in the IS curve affect aggregate demand.