E487 Intermediate Macroeconomics
Final Exam
Fall 1998
Dr. Christopher J. Waller
- Derive AD from the IS-LM model. Show and explain how an increase in the government spending affects aggregate demand.
- New Classical economists argued that announced decreases in the money supply may not be credible since private agents believe the Fed has an incentive to renege on its promise to decrease the money supply. Show and explain why the Fed has an incentive to renege on its announcement of decreasing the money supply. Then show and explain what happens if the announcement is NOT credible but the Fed carries out its announced policy.
- The following statements appeared in an article in the Wall Street Journal on July 31, 1997:
"Poland's central bank will raise interest rates …to cool the feverish demand for consumer goods…furthermore it called the rate increase a pre-emptive move against the effects of unexpected government spending on reconstruction in flood ravaged southwest Poland."
From a stabilization perspective, what is the Polish central bank trying to do? Use the IS-LM model to answer the question.
- Real Business Cycle economists have argued that the 1981-82 recession had nothing to do with monetary policy credibility or workers having adaptive expectations -- it just "looks that way." Using the classical version of the AS-AD graph, show and explain what happens when: a) a negative technology shock hits while b) the Fed tries to put downward pressure on the price level. What appears to happen from the monetary contraction? From your analysis is it correct to say that the Fed caused the 1981-82 recession or does it just "look that way"? What does it say about correlation versus causation when looking at data?