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BEEM120

January 2021

MACROECONOMICS OF MONEY AND FINANCIAL MARKETS

Question 1

Outline a two-period model of consumption based on intertemporal behaviour.  Provide an  interpretation for the consumption Euler equation.  Derive the consumption function for your two-period model and determine the consequence of an increase in future income.

Question 2

Suppose that a central bank promises to pursue a policy of zero inflation.  In the context of the Barro-Gordon model, explain why such a promise is not credible.  Derive the rate of     inflation when a central bank acts under discretion and explain why it is possible to reduce inflation (on average) by appointing a conservative central banker.

Question 3

Consider the Mundell-Fleming model in which a country operates a freely floating exchange rate system and there is perfect capital mobility.  Explain the effects of monetary policy on   the macroeconomy. What are the implications of assuming capital is not perfectly mobile?