Final Exam

Spring 1999

Professor Christopher J. Waller

1.

1. Derive the aggregate demand curve.
2. Explain why the aggregate demand curve is different than the typical micro demand curve for a good.
3. Show and explain how a decrease in government spending will affect the aggregate demand curve.

2. Derive and explain the reasoning behind the short run aggregate supply curve in the neoclassical synthesis (or "labor fooling") model.
3. In September and October of 1998, the Fed cut interest rates by 3/4 % point. The following quote appeared in the Lexington Herald Leader on December 26, 1998:

"…the nation's output grew robustly. Orders to factories for big-ticket durable goods jumped 1% last month. It was led by a 9.9% surge in orders for primary metals, transportation equipment and industrial machinery."

Using the IS-LM model, show and explain how this happens.

4. 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?