Section A

40%

Please use the MCQ answer sheet provided. Please answer all EIGHT questions. Each question has only one correct answer and each question carries equal weight.

Question 1

1.   In late 2007 and early 2008, the U.S. Federal Reserve pursued expansionary monetary policy. Which of the following occurs because of this type of monetary policy action?

A)  The LM curve shifts down.

B)  The LM curve shifts up.

C)  The IS curve shifts rightward as the interest rate falls.

D)  The IS curve shifts leftward as the interest rate increases.

E)  None of the above.

2.  The capital ratio is the ratio of a bank's:

A)  assets divided by its liabilities.

B)  income divided by its assets.

C)  capital divided by its assets.

D)  capital divided by its total liabilities.

E)  none of the above.

3.  A reduction in the unemployment rate will tend to cause which of the following?

A)  An increase in the separation rate.

B)  A reduction in the nominal wage.

C)  A reduction in the duration that one is unemployed.

D)  All of the above.

E)  None of the above.

4.   For this question, assume that the Phillips curve equation is represented by the following:

πt – πt-1 = (m + z) – αut

Which of the following will not cause an increase in the natural rate of unemployment?

A)  A reduction in m.

B)  A reduction in z.

C)  An increase in α .

D)  An increase in the expected rate of inflation.

E)  All of the above.

5.   If the output is too high to achieve the medium run equilibrium, the central bank will:

A)  increase interest rate.

B)  reduce interest rate.

C)  increase money supply.

D)  increase inflation rate.

E)  none of the above.

6.  A "conservative" central banker cares:

A)  less about inflation and more about unemployment than the government.

B)  more about economic growth and less about inflation.

C)  more about inflation and less about unemployment than the government.

D)  less about economic growth and more about inflation.

E)  none of the above.

7.   Kalecki’s theory:

A)  suggests that recessions are causes by stochastic shocks.

B)  suggests that recessions happen with certainty.

C)  relies on the assumption of rational expectations of economic agents.

D)  relies on the assumption of the animal spirit of a capitalist.

E)  none of the above.

8.   Under a fixed exchange rate regime, suppose there is an increase in housing wealth that causes an increase in consumption. This wealth-induced increase in consumption will     cause:

A)  an increase in investment.

B)  a reduction in net exports.

C)  an increase in imports.

D)  all of the above.

E)  none of the above.

You must use ONE WHITE answer sheet per question as per the number supplied.  To provide an answer that exceeds the space on the answer sheet, please raise your        hand to request a YELLOW answer sheet.

Section B                                                                                                                           40%

Answer TWO questions out of four.

2.   Use the IS-LM model and short run assumptions to answer this question. Suppose the    central bank’s instrument is the nominal interest rate. Assume prices remain constant.     Suppose there is a simultaneous contractionary fiscal policy and an expansionary            monetary policy. Explain what effect this policy mix will have on output and the nominal    interest rate. Based on your analysis, do we know with certainty what effect this policy     mix will have on investment? Explain.                                                                        [20%]

3.   Explain the natural unemployment rate and its relationship to the inflation rate.       [20%]

4.   Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in

consumer confidence both in the short run and in the medium run.                           [20%]

5.

    Write out the equation that represents the Taylor rule.

    Discuss how the Taylor rule is used to explain the implementation of monetary policy.

[20%]

Section C                                                                                                                           20%

Answer ALL parts of this section

You must now answer one question from this section.  As before, please use a new WHITE answer sheet.  To provide an answer that exceeds the space on the answer sheet, please raise your hand to request a YELLOW answer sheet.

6.  The table below gives the annual income of five full-time workers.

    Calculate the mean annual income. Explain your calculations.                  Calculate the median of the annual income. Explain your calculations.      Calculate the variance of the annual income. Explain your calculations.

    Calculate the standard deviation of the annual income. Explain your calculations.     Calculate the range of the annual income.

Estimating regression equation:  Yi  =αi  + βiXi   + εi where Y is the mean annual income of full- time workers age 25 or older measured in UK pounds, and X is the number of years of         schooling completed, produces the following results:

    What is the value of the OLS estimate of the coefficient on X? Provide an

interpretation of this coefficient paying particular attention to the units each variable is measured in.

    Is the intercept term significantly different from zero at the 5% level? Explain your

answer by referring to p-value.

    Is the coefficient on the explanatory variable significantly different from zero at the

5% level? Explain your answer by referring to the 95% confidence interval.

    What is the interpretation of the R2 value?