E322 Intermediate Macroeconomics

Final Exam

Fall 1997

Dr. Christopher J. Waller

  1. Derive and explain the reasoning behind the short run aggregate supply curve in the neoclassical synthesis ( or "labor fooling") model.

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  2. The New Classical model can produce an expansion of output when the money supply increases thereby replicating the Keynesian model. Show and explain how this can happen. Then compare this expansion of output with the one that would occur in the adaptive expectations case.

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  3. In a Wall Street Journal article entitled "A Bush Economist Is Urging Hands Off," about John Taylor, an economist on the Council of Economic Advisors at the time, the following statement appears:

    4. "At the Fed for instance, the importance of credibility is stressed...hard-liners at the Fed ... say the Fed can reduce inflation to zero without a recession. Once the public believes the Fed is serious, it's argued, the public's behavior will change -- inflationary expectations will drop -- and the Fed's job will be easier."

    Show and explain why credibility is so important for avoiding a recession when contracting the money supply. Then show and explain why the Fed's announced policy may lack credibility.

  4. Show how an increase in the money supply affects aggregate demand when:
    1. the IS curve is steep (investment demand is interest inelastic).
    2. the IS curve is flat (investment demand is interest elastic).