Economics 470/570 Part I - Definitions. Define each of the following (2 points each, 12 points
total).
Winter 2005
Final Exam
1. Liquidity
2. Discount window and Discount rate
3. Velocity of money
4. Policy effectiveness
5. Monetary shock and Real shock
6. Natural rate hypothesis
Part II - Short Answer. Answer FOUR of the following questions (7 points each, 28 points total).
1. Show that the Fed cannot simultaneously control bank reserves and the federal funds rate and therefore cannot adopt both as operating targets.
2. What is the difference between real and nominal interest rates? How do the ex-ante and ex-post real interest rates differ?
3. Derive the IS curve graphically and explain intuitively why the IS curve slopes downward.
4. Use the fixed wage AD-AS model to show the SR and LR adjustment to AD shocks.
5. How does the New Keynesian model differ from the traditional Keynesian and New Classical models?
Part III – Essays and problems. Answer FOUR of the following questions (15
points each, 60 points total)
1. What are the functions of money, i.e. why does money exist? Relative to a barter economy, what problems are overcome by the use of money?
2. Describe the three tools available to the Fed for controlling the money supply. How do defensive and dynamic open-market operations differ? How do primary, seasonal, and secondary credit differ? What are the advantages and disadvantages of each tool
3. 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?
4. Use the IS-LM model to examine how the relative effectiveness of monetary and fiscal policy changes as money demand becomes less sensitive to the interest rate. Explain the result intuitively.
5. Compare and contrast the effects of an expected increase or decrease in the money supply on prices and output in the traditional Keynesian, New Classical, and New Keynesian models.
