Final
Examination
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Directions: do all work on the exam itself, answering
the question in the space provided. If
you require extra space, use the back of the exam, indicating that you have done so.
Each problem has the indicated weight. |
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I am not answering
question______________
1
If
we impose a permanently higher tax on wage income, and use the funds to provide
services that people value, then there will be no impact on the hours people
work.
2
A Phillips Curve gives the relation between
expected inflation and employment.
3
The
natural rate of unemployment measures the rate achieved at the peak of a
business cycle.
4
Inflation
robs us all.
5
If
people would only love their children more, the trade deficit would fall.
6
The
money multiplier measures the impact of an increase in the money supply on the
Y curve.
7
The
Theory of Real Business Cycles predicts that real wages will decline during a
recession. By the test of “does it fit
the facts” it is inferior to the explanation based on unanticipated inflation.
8
If
we went back to the Gold Standard, and assuming we could avoid runs on banks
like 1929, we would be able to ensure stable prices.
1
Suppose
that the Federal Reserve System engaged in a $100 Billion Open Market
Operation.
a)
Explain
what an Open Market Operation is and how the Fed would carry it out.
b)
Assuming the Quantity Theory of Money works
without qualification, explain what the impact of the Open Market Operation
would be on the price level. (You might
also want to define the Quantity Theory of Money in your answer).
c)
Trace
through any implications of the Open Market Operation on the level of
investment.
2
GREEN
is currently enjoying a period of relative stability. For a number of years, the unemployment rate
has been relatively constant at 6%, and the inflation rate has been steady at
about 3%. As a result of an election, a
new administration is taking power.
Their election was an upset, with the possible exception of the party
leader, no one saw it coming. The new
party believes that the high level of GDP is responsible for significant
environmental degradation. Accordingly,
they have mandated a new 25 hour work week. With people working less, they
figure a lower level of output and hence less environmental damage. The new administration plans no other
changes. In particular, they have pledged
no impact on monetary policy. (While a
cynic might assume that people will find a way around the new legislation, you
should assume the new administration will be able to make the new work week
stick.)
a)
Show
what effects you expect this policy change to have on GREEN’s
inflation rate, interest rate and unemployment in the current year.
Note: it is not
enough to guess the right answers: you must explain why these are the correct
answers.
b)
Show
what effects you expect this policy change to have on GREEN’s
inflation rate, interest rate and unemployment in the long run.
Note: it is not
enough to guess the right answers: you must explain why these are the correct
answers.
I have attached a
news column from the
·
Is this tax cut a good idea?
·
Assuming that it is adopted, what would be its
likely impact on key economic variables?
·
Do you agree or disagree with the analysis in this
article. Why or why not?
Some suggestions:
·
Do not comment on Messrs O’Neill, Lindsey, and
Harvey Pitt. Forget personalities.
·
Do not get into the discussion of gold.
·
Remember, this is a chance to show you can apply
the analysis you learned in this course.
I would expect to see graphs and words like “Demand for Loans” and “Y
and M curves” dripping from your answers.