Econ 100 Final Exam: Econ 100 Tuesday 12/14 10:30-12:00 same room Readings 1. Text Ch. 13: Money, Banking and Monetary Policy Ch. 14: Activist-Nonactivist Debate Paul Krugman “ How Did Economists Get It So Wrong?” particularly sections IV-VII (in the readings folder) Not required: but for a little more background on the Monetarists thinking see Milton Friedman’s AEA presidential address, The Role of Monetary Policy? (readings folder), particularly see Sec I “What Monetary Policy Can’t Do” and Sec III “How Monetary Policy Should Be Conducted” What are the key points? Ch. !3: Money, Banking and Monetary Policy Which governmental organization controls/manages monetary policy? What are the three instruments that we use to affect monetary policy and how do they increase/decrease the money supply? How does monetary policy affect real GNP, unemployment and real and nominal interest rates in o Short-run o Long-run What is the quantity theory of money? o How does it explain the relationship between increases in the money supply and real and nominal variables? o Is it a long-run or short-run model? o What is (are) the historical (data) evidence that this model is correct and under what circumstances? When can expansionary monetary policy have effects on real variables? o What economic conditions can cause money to have a real effect? Ch. 14: Activists-Nonactivists Debate If we divide economists into (neo)Keynesians (Krugman’s salt water economists) and Monetarists (Krugman’s freshwater economists), then: o Which group favors an activists approach, why and what and how would they hope to accomplish (in real economic variables)? o Which group favors a non-activist approach, why and what/how would they favor non-activism? If a recession happened: o What would an activist propose to do and why (i.e., what would be the hoped for economic outcomes and why would they occur according to their theory)? o Why would a non-activist propose “doing nothing”, i.e., how would the economy eventually respond and how would that take place? Under what economic conditions would: o The monetarists likely to be correct? o The neo-Keynesians likely to be correct? Congress is considering legislation which would a) extend the Bush-era decrease in the marginal tax rate for individuals earning more than $250,000 per year and b) extending unemployment benefits for approximately 3 million people who have been unemployed more than 26 weeks. o Suppose you worked for the Congressional Budget Office and were asked: To explain what the macroeconomic impacts of both these proposals would be on the economy? That is, use the neo-Keynesian SR and LR model to explain how each of the programs could affect real GDP, unemployment and inflation in both the SR and LR What current economic conditions might be important to consider in assessing the relative impact of these two proposals?