Fiscal policy and monetary policy

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FINAL EXAM:  ECON 2100 – Spring 2020:

1-) In the following question, you are asked to determine whether the statements are true or false. Explain your reasoning to get full credit:

  1. a) Natural level of unemployment cannot be changed through policy.

 

 

 

  1. b) Assume velocity is constant. Suppose Fed keeps the money supply constant as well. Then, when the real GDP grows by 10 percent, prices should decrease by 10 percent.

 

 

 

 

  1. c) Assume velocity is constant. Suppose Fed wants to follow a zero-inflation policy. Then, the rate of money growth should be kept equal to zero by the Fed.

 

 

 

  1. d) Credit Cards are considered money because they are a medium of exchange.

 

 

 

  1. e) Gold is an example of fiat money.

2-) The Government observes a significant amount of unemployment in the economy. Some argue that the government should stimulate the economy in order to decrease the unemployment level using monetary policy.

  1. a) Using the theory of liquidity preference, show the effects of expansionary monetary policy. What will happen to the interest rate? What will happen to the aggregate demand as a result? You must explain why we observe this relationship.

 

  1. b) Draw the new short-run equilibrium of the economy. What happened to the price level, output and the unemployment level in the new short-run equilibrium?

 

  1. c) How will the economy adjust in the long-run? Explain the transition and show it on a graph. What will happen to the price level, output and unemployment?

 

  1. d) Show how the same economy will adjust in the short-run and the long-run using a Phillips curve this time. Use the same labels you used for the initial, the short-run and the long-run equilibrium that you used in part c).

 

  1. e) Would you advise the government to undertake this policy considering your answers to part c) and d)? Why? What will be happening to the policy options in the long-run? Explain by talking about the trade-off options between unemployment and inflation.

 

 

 

 

 

 

 

 

3-) Assume there is a temporary increase in oil prices.

 

  1. a) What will happen to the price level, unemployment and output when the oil prices increased in the short-run? Show it on a graph.

 

  1. b) Now suppose government does not intervene? How will the economy adjust in the long-run? Explain.

 

  1. c) Now suppose government decided to intervene. What can be done? Give one example of a fiscal policy and one example of a monetary policy with the reasoning behind them? How will those policies affect the economy?

 

  1. d) What will happen to the price level, output and unemployment as a result of this intervention? What is the trade-off decision that the government must make in this case?

 

 

 

 

 

 

 

 

 

 

 

 

 

4-) Suppose we have an economy which is in a long-run equilibrium.

 

 

  1. a) Graph this economy using long-run and short-run Phillips curves.

 

 

  1. b) Now suppose the aggregate demand decreased as the government spending is reduced. Show what happens to the economy on a Phillips curve graph. Where is the economy’s current position on the graph now? Is it possible to return to the original position (with the initial inflation and unemployment levels) through monetary policy? Explain.

 

  1. c) Now, you should consider an alternative case. Starting from the initial long-run position of the economy, suppose the oil prices increased. Show the new position of the economy on a Philips curve graph. Is it possible to return to the original position this time (with the initial inflation and unemployment levels) through monetary policy? Explain.