PART 1

(marks for each section, out of 100, shown in brackets)

Q1.In the following model, 几t (几e ) is inflation (expected inflation), u () is the     unemployment rate (potential), and m is the rate of growth of the money supply:

几t  = −6(ut − ) + 几t(e)

几 t(e) = u几t−1 + (1 − u)几t(e)−1

Δut  = a(mt − 几t−1)

a is negative; 6, u are positive. u is less than one.

(b) Find the equilibrium for inflation and unemployment.                              (10)

(c) Find the characteristic equation and comment briefly on its possible properties.           (60)

(d) Does this model show a long-run trade-off between inflation and unemployment? Explain your answer in terms of the model's coefficients.                             (20)

Q2.

In the following model, m is the log of the money supply, p the log of the price level, y the log of output, and Et−1Xt is the rational expectation of Xt formed with               information on period t − 1 data:

mt = pt + 6yt

yt  = y ∗ + 0.5F[(pt − Et−1pt ) + (pt − Et−2pt )]

mt = − y(yt−1 − y∗ ) + ut

y ∗ and m are constants; ut is an i.i.d. error term.

(b) What is the solution for output and inflation?                                           (70)

(c) Does monetary feedback policy have an effect on output in this model? Briefly explain your answer.                   (20)