What are rational expectations? Can they influence the outcome of a monetary policy?
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Question 1
a) What are rational expectations? Can they influence the outcome of a monetary policy? (5 marks)
b) List three reasons why an economy may choose a fixed exchange rate regime. (5 marks)
Question 2
Start with a closed economy in equilibrium, and use the IS-LM-FE model to determine the impact of the following shocks on these real macroeconomic variables: output, the real interest rate, consumption, real wage, employment, investment, and the price level. Draw a graph for each.
a) A decline in the working-age population. (5 marks)
b) Volatility in the prices of stocks and bonds. (5 marks)
c) An increase in the corporate tax rate. (5 marks)
d) Reduction in transaction costs of non- monetary assets. (5 marks)
Question 3
The real money demand is （Md / P） = （Y/4）- 125i, where Y is the total output and i is the nominal interest rate of non-monetary assets. Assume Y = 11,700 and i= 5%. What is the money supply?
Question 4
Consider the following relationships describing relationships among key economic macro variables in a closed economy:
Cd =500 +0.75 (Y-T ) – 200r
Id = 150 – 200r
T=140 – 0.3Y
G= 800
M/P = 0.4Y- 300i
M= 150,763
Assume that in the short run, price level is P=110, inflation π =3% and the full employment level of output is ????̅ = 2300.
a) Find the equations of the IS and LM curves. (10 marks)
b) Find the short run equilibrium (where IS=LM). (10 marks)
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