Format: 15 multiple choice, 2 problems; Chapters 15-17, 19

Bring: pencil, calculator (BRING YOUR OWN CALCULATOR. YOU MAY NOT SHARE!)

Don’t forget to study questions from homework 5!

15 Monetary Policy

• The demand for money
• why is money demand downward sloping with respect to the interest rate?
• differences between transactions, precautionary, and speculative demands for money
• what shifts the MD curve?
• why is the MS curve vertical? how will OMO shift the MS curve? how do OMO affect the interest rate?
• Keynesian view on money and AD:
• how do changes in the MS (and interest rates) affect C, I, AD, output, prices, and unemployment?
• how are C and I the "transmission mechanism" of monetary policy?
• Monetarist view
• equation of exchange
• what does constant velocity imply about the affect of changes in the MS?
• using the equation of exchange (homework 5)
• why do Monetarists believe that changes in the money supply affect mostly prices ?
• How do Monetarists and Keynesians differ in their monetary policy response to
• inflation?
• unemployment?
• who favors rules? who favors discretion? what is the difference?

What is stagflation? why are fiscal and monetary policies not good options in dealing with stagflation?

• Phillips curve
• why does shifting AD produce a tradeoff between inflation and unemployment?
• how does shifting the AS curve affect this tradeoff?
• Supply-side policies
• how might tax cuts affect the AS curve?
• contrast the views of Keynesians and supply-siders on tax cuts--AD vs. AS
• revenue effect: how do changes in tax rates affect the tax base? what is the implication for tax revenue?--the Laffer curve
• other ways to shift AS: human capital investment, deregulation, infrastructure investment

• long-run economic growth vs. short-run economic growth & the production possibilities curve
• how is economic growth is measured?
• what is the average annual long-run growth rate for the U.S.?
• how does the post 1973 growth rate compare to this?
• slowdown in the rate of economic growth or productivity growth
• why the concern?
• implications for standard of living
• possible measurement problem with the service sector
• rebound in 1990s
• what factors influence economic growth? how can government policy influence economic growth?
• how do markets provide incentives that postpone resource exhaustion and extend the limits to growth?

• who is responsible for monetary and fiscal policies? what are the tools of monetary and fiscal policies? supply-side policies?
• how are policies used in a recession? to control inflation? stagflation?
• what does it mean to "fine tune" the economy?
• how have U.S. business cycles changed since WWII? how has the U.S. fared in achieving the economic goals set forth in 1978? (in general)
• what problems prevent us from achieving our economic goals through policies?
• goal conflicts between monetary and fiscal policy
• measurement issues & design problems-- forecasting, model design
• time lags--fiscal vs. monetary policy
• how is the time lag problem related to the forecasting problem?
• how do monetarists, New Classicals, and New Keynesians differ on the role of government in fine tuning the economy?
• rules vs. discretion
• rational expectations