Economic policy, examination questions, school year 2010-2011 A. Questions, where brief, compact answer is required 1. Neutrality of money in classical model: brief characteristic, implication for economic policy 2. Hyperinflation in some European countries after WWI: basic causes, mention main stabilization steps 3. Short term economic policy of Stop and Go type 4. Monetary policy in an open economy with fixed and floating exchange rate 5. Main features of golden standard before WWI 6. Alternative explanations of the origin, depth and duration of Great Depression 7. Basic features of monetarism 8. Describe (both in words and graphically) short-run exchange rate adjustment after money supply increase 9. Disinflation policies and twin deficits in the US economy in the first half of 1980s 10. Inflation targeting and Taylor s rule basic features 11. Basic features of quantitative theory of money 12. Define natural rate of unemployment 13. Advantages and disadvantages of fixed exchange rate 14. Explain a concept of stagflation 15. Main differences between Classical and Keynesian model 16. New Deal basic characteristics 17. Social-market economy in Germany after WWII 18. Describe (both in words and graphically) short-run exchange rate adjustment after a permanent change of fiscal policy 19. Problems and termination of Bretton-Woods system at the beginning of 1970s
20. Liquidity preference and interest in Keynesian model 21. In Keynesian model, equilibrium with involuntary unemployment can exist only with liquidity trap and/or interest inelastic investment function. Comment shortly 22. Fiscal and monetary multiplier in classical and Keynesian model 23. Bretton-Woods institutions and their mission 24. Main positive results of Marshall plan 25. Explain a concept of indicative planning and give the examples of practical use after WWII 26. Phillip s curve in its original form: short explanation, link to aggregate supply curve, trade-off between inflation and unemployment 27. Friedman s demand for money 28. Expectations-augmented Phillip s curve 29. Basic monetarist recommendations for economic policy 30. Kennedy-Johnson tax cut in 1963-1964 31. Keynesian stabilization policies in 1960s 32. Disinflation in the US at the beginning of 1980s: basic measures 33. New Keynesian Economics nominal wage rigidity model 34. Monetarist approach to stabilization policies in 1960s 35. Stabilization policies with Bretton-Woods system of fixed exchange rates: expenditure changing vs. expenditure switching 36. Three basic characteritics of New Classical Macroeconomics 37. Anticipated and un-anticipated monetary policy explain the difference 38. Fiscal sustainability and fiscal rules 39. Barro-Ricardian equivalence 40. Balance of payments crisis in emerging economies, either at fixed or floating exchange rate
41. Basic roots of global financial and economic crisis 2008-2009 42. Nominal convergence criteria for Euro zone entry B. Questions, with answers just Yes or No 1. In an original Keynesian model of closed economy equilibrium is achieved via price adjustment consumption is a function of interest only demand for money (liquidity preference) is function of output and interest 2. Bretton-Woods system was based on fixed exchange rates reserve currency was British pound was terminated in November 1967 after the devaluation of British pound 3. In an original Keynesian model of a closed economy aggregated demand is horizontal IS curve represents such values of output and interest, that simultaneously ensure equilibrium on the labor market liquidity trap is a situation, when LM curve is horizontal, money multiplier is equal zero and monetary policy is inefficient 4. Phillips curve is important for economic policy, it is a basis for a trade-off between unemployment and interest rate for the first time, it has been defined on British data as a relation between wage inflation and unemployment in 1970s and 1980s, the data fully confirmed its validity both for short- and long-run 5. In original Keynesian model ISLM model assumes flexible prices and wages crowding out the investment is not as strong as in the classical model at the liquidity trap, the money multiplier is equal zero 6. In case of floating exchange rate in the short-run, decrease of money supply leads to depreciation of domestic currency in the long-run, exchange rate reacts on money supply as any other price real exchange rate is defined as a product of nominal exchange rate and a ratio of foreign and domestic price index 7. Neoclassical synthesis was a result of Keynesianism coming closer to monetarism
in the short-run, allows for unemployment because of insufficient aggregate demand, in the long-run, the aggregate supply is vertical in the long-run, allows for full employment equilibrium only 8. Stabilization policy in 1960s Okun s law is a relation between the change in unemployment rate and difference between actual and natural GDP growth Phillip s curve is a relation between inflation and exchange rate for short-run stabilization, monetary policy was considered as entirely inefficient 9. Say s law implies supply creates its own demand aggregate demand is always higher than aggregate supply involuntary unemployment can not exist 10. Quantitative theory of money is not consistent with Say s law implies money neutrality assumes constant velocity of money 11. Possible causes of length and depth of Great Depression New York stock exchange crash in October 1929 too low growth of money supply during several years after 1929 inefficient gold standard system 12. Following measures and/or institutions were important part of New Deal National Industry Recovery Act (NIRA) Unions for America (UfA) Federal Deposit Insurance Corporation (FDIC) 13. Crowding-out effect in classical model, leads to a fall of money supply in Keynesian model, its impact depends of interest elasticity of the demand for money has a role neither in classical, nor in Keynesian models 14. Bretton-Woods system introduced fixed exchange rate, based on a parity of British pound to gold system of flexible exchange rates system of fixed exchange rates and US dollar became quickly a generally accepted reserve currency 15. Neoclassical synthesis aggregate supply is horizontal in the long-run in the long-run, the adjustment is the same as in the classical model it is a representative theory of monetarism
16. Mundell-Fleming model with fixed exchange rate fiscal policy is efficient monetary policy is very efficient none of these policies has an effect on output and employment 17. Monetarism recommends fiscal and monetary stimulation of aggregate demand discretionary monetary policy regular increase of money supply (e.g. 2% per year) 18. Sacrifice ratio is rate of fall of output as a consequence of disinflationary policy amount of private investment, crowded-out by higher governmental expenditures fall of exports after revaluation of domestic currency