DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 7, 2012
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
INSTRUCTIONS:
1.
Answer ONLY the specified number of questions from the options provided in each
section. Do not answer more than the required number of questions. Each section takes
one hour.
2.
Your answers must be on the paper provided. No more than one answer per page. Do not
answer two questions on the same sheet of paper.
3.
If you use more than one sheet of paper for a question, write “Page 1 of 2” and
“Page 2 of 2.”
4.
Write ONLY on one side of each sheet. Use only pen. Answers in pencil will be
disqualified.
5.
Write ------ END ----- at the end of each answer.
6.
Write your exam identification number in the upper right-hand corner of each sheet of
paper.
7.
Write the question number in the upper right-hand corner of each sheet of paper.
Section 2: Macroeconomics, Monetary Theory, and Econometrics—Answer One Question.
2A. (Econ 202) Compare fiscal policy with monetary policy. What are they, how are they similar,
and how do they differ? Your answer should consider the role of government deficits (i.e., the
national debt) in each and at least touch upon the concepts of “monetizing the debt,” “crowding
out,” and “Ricardian equivalence.” Would you have favored employing fiscal policy, monetary
policy, both, or neither in the current financial crisis? Explain why? (Hint: your answer to the
question of which policies you advocate will be judged on the basis of how well you defend your
answer, not on the basis of which precise policies you prefer.)
2B. (Econ 235) Describe the Federal Reserve System. Explain how each of its three traditional
instruments of control—discounts, open market operations, and reserve requirements—works
and show how they change the money stock. Until the recent financial crisis, which was the most
important and why? Which instrument(s) plays a role in monetizing the debt and generating
seigniorage? Consider the comparative advantages and disadvantages of Fed targeting of interest
rates versus targeting some monetary aggregate. How does this relate to the Taylor Rule? What
kind of monetary policy do you advocate?
(over)
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DEPARTMENT OF ECONOMICS
SAN JOSE STATE UNIVERSITY
MASTER’S COMPREHENSIVE EXAMINATION
DECEMBER 7, 2012
6:00 P.M. TO 9:30 P.M.
PROCTOR: J. HUMMEL
2C. (Econ 203) Consider the following results using a Linear Probability Model and Probit model to
predict the probability of someone choosing an adjustable rate mortgage:
-------------------------------------------------------------------------------------------------adjust (=1 if adjustable rate)
sample mean
LPM(b)
Probit(b)
-------------+----------------------------------------------------------------------------------value of fixed rate
13.25
0.15
0.50
margin (variable – fixed rate)
2.29
-0.13
-0.45
10 yr. T-bond rate
1.60
-0.80
-2.40
points ratio (adj./fixed)
1.50
-0.09
-0.30
net worth of borrower ($100K)
3.50
0.03
0.08
intercept
-0.08
-1.92
a. What are the disadvantages of using the LPM model? What are the advantages and
disadvantages of using the Probit model?
b. Provide an interpretation of the impact of a one-unit increase in the value of the margin rate on
the probability of choosing an adjustable rate loan. Do the same for the impact of the 10 yr. bond rate.
c. Comment on the signs of the coefficients for both regressions. Are their differences and do they
make economic sense? Be sure to provide brief explanations for each variable.
d. Use the LPM model to calculate the probability of choosing an adjustable rate loan using the
sample mean values. If the fixed rate goes down by 200 basis points, e.g. from 13.25 to 11.25, how does
the probability change?
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