Econ 100B Final Exam Spring 2019

Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit

Econ 100B

Final Exam

Spring 2019

140 points

Part I. Material Since the Second Midterm (66 points total; 56 minutes total)

Question 1 (15 points total; 13 minutes total)

A. (10 points) Explain why the monetary policy reaction function (MPRF) slopes up. That is, explain why an increase in n is followed by an increase in u. Equations alone are insufficient. "Explain" means use words to tell the story.

B. (5 points) Suppose the central bank has the Taylor Rule we used in the textbook in which only inflation (and not unemployment) is relevant. Suppose further that the central bank decides it will fight inflation somewhat aggressively when tt〉4 percent, butthat it will not fight inflation at all when tt<4 percent. Draw the MPRF. Briefly explain why you drew it the way you did.

Question 2 (11 points total; 9 minutes total)

A. (6 points) Explain why the Phillips curve slopes down. That \s, explain why a decrease in u is followed by an increase in tt. Equations alone are insufficient. ''Explain" means use words to tell the story.

B. (5 points) Akerlo^ Dickensand Perry ([996. full citation will be posted on Piazza) proposed that ^social norms,zare relevanttothe Phillipscurve. In particular they argued there are social normsthat stop firms from cutting wages becauseof a shared societal beliefthat it is unfairto workers to cut their wages. When unemployment isso high thatthere would usually be wage deflation (that \s, %Awages < o, wagestomorrow< wages today, pay cuts), social norms prevent employers from actually cutting wages.

Let uHbethe unemployment rate at which there would usually be wage deflation in theabsence ofthese social norms. Drawthe Phillipscurve that incorporates these social norms. Briefly explain why you drew it the way you did.

Question 3 (20 points total; 17 minutes total)

Suppose the economy can be described by the following. Units are billions of $ per year.

MPRF： u = 0.05+ 4(n-0.03) PC: n = 0.03 - o,5(u - 0.05)

A. (10 points) Suppose expectations are static. What are the equilibrium values ofthe inflation rate and the unemployment rate? Show all your work. Put a box around your answers. (If you need scratch paper, use the inside cover ofthe exam.)

B. (4 points) Based on the equations in the prompt, what are the values of each ofthe following?

u*  uo  Tie  t?

C. (6 points) Suppose instead that expectations arethe very strong form of rational expectations (''crystal ball expectations"). If aggregate demand falls/ will the new equilibrium unemployment rate be greater than, the same as. or less than the value you found in part A? Will the new equilibrium inflation rate be greater than, the same as. or less than the value you found in part A? Defend your answers.

Question 4 (20 points total; 17 minutes total)

At a conference on May 3 at Stanford (linkswill be posted in Piazza), macroeconomists and Federal Reserve Bank presidents debated what strategy the Fed should pursue ifthe Fed's targets for nominal interest rates-the interest paid on excess reserves (IOER) and the federal funds rate (FFR)- hit the zero lower bound (ZLB) the next time a recession hits. This is the sort of worry that keeps central bankers up at night.

A. (4 points) What does it mean for the FFR or the IOER to ''hit the zero lower bound”?

B. (6 points) One concern expressed is that the''natural rate of interest” (what we labeled r0 in our Taylor rule, but central bankers routinely refer to as r*) has fallen over the last 25 years. Calculate the nominal rates of interest in each line below. Then discuss why a fall in the natural rate of interest, r*, makes it more likely that the central bank will hit the ZLB in the next recession.

If r* = 3% and TTe = 2 percent, then the nominal rate of interest =

If r* = 1% and TTe = 2 percent, then the nominal rate of interest =

C. (5 points) Why doesthe ZLB ''interfere with the central banks ability to offset negative aggregate demand shocks to the economy'? (Quote is from a paper by FRB-NY President (and Cal alum!) John Williams, link will be posted in Piazza.)

D. (5 points) Williams (link will be posted in Piazza) suggests the Fed should increase ne by announcing a higher inflation target during boom periods. Why would increasing inflationary expectations be helpful to the Fed's monetary policy efforts when they face the ZLB?

Part II. Material From the Entire Course (74 points total; 64 minutes total)

Question 5 (24 points total; 21 minutes total)

A. (6 points) Explain the connection between long-term interest rates and the long-run flexible price model. Your explanation should include a clear definition of “long term interest rate."

B. (3 points) Define each of the three types of expectations： static, adaptive, and rational. Equations or words or both are acceptable.

C. (5 points) What type of expectations are relevant to long-term interest rates： static, adaptive, or rational? Defend your answer.

D. (10 points) The day after Pres. Trump was surprisingly elected in 2016, the US Treasuries yield curve got steeper. There was no change in short-term interest rates. T rump's election surprised everyone. Trump/ unlike his opponent Secretary Clinton/ had promised a big tax cut. Why didthe surprise election of a candidate who promised a big cut in taxes cause the yield curve to get steeper, even though it would be a full year before the tax cut bill was written, voted on. signed into law. and implemented? Would the effect on the yield curve have been the same if Trump's election had been widely anticipated, rather than the surprise it was? Explain.

Question 6 (13 points total; 11 minutes total)

Suppose the economy can be defined by the following. Units are billions of $ per year.

S = 24 % g = 2 % a = 1/3

n = 1 % 5 = 3% e 二匕。。。

A. (9 points) In BGE. what are the values of K/Y. Y/L. and K/L? You must write down the formulas you are using, then plug in the valuesz then simplify-or no credit. If you cannot complete the math without a calculator go as far as you can to receive the most partial credit. Please put a box around each answer.

B. (4 points) In balanced growth equilibrium in this economy, what isthe value of the annual rate of growth of output per worker? In one sentence (which can be brief), tell us how you know that's the answer.

Question 7 (12 points total; 10 minutes total)

A. (6 points) Suggest one policythat will increase efficiency (E) orthe growth rate of efficiency (g(E) = g). Tell us whetheryou thinkyour policy will increase efficiency but not produce a permanent change in g, or whether it will produce a permanent change in g. Defend your answer.

B. (6 points) We knowthat in balanced growth equilibrium, the growth rate ofthe standard of living equalsthegrowth rateof efficiency. Why then do policiesdesigned to increase the standard of living often involve increases in the saving rate even if increasing thesaving rate has no effect on E or g(E)?

Question 8 (15 points total; 13 minutes total)

The investment equation we typically used in Econ 100B is J = J, — I「戸

A. (5 points) Define "investment spending/' What common mistake do many people make when listing the types of purchases included in "investment”?

B. (10 points) Discusswherein the investment equation isthe rolefor expectations. Be sure your discussion makes clear whose expectations. And. expectations of what?

Question 9 (10 points; 9 minutes)

John Maynard Keynes famously wrote. "In the long run/ we are all dead." The full quote, with a bit more context, is：

But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a tas^ if in tempestuous seasons they can only tell us. that when the storm is long past, the ocean is flat again. (Source： Keynes, A Tract on Monetary Reform (1923^ Chapter 3.)

(Tempestuous means "very stormy.,z) Why do we study the long run in macro if "in the long run/ we are all dead”?


2022-12-14