Midterm Examination                                            Fall 2007
Macro II                                                       Page Total = 2

DIRECTIONS: Obey page limits. If a question has multiple parts, indicate
exactly where you answer each part. This exam has multiple sections; be sure to
follow the directions for each section. Allocate your time carefully: many
students spend too much time on the short answer questions. Time allocations
are the same as point allocations.

I. VERY SHORT ANSWERS:
ANSWER ALL OF THESE. For each pair of terms below, carefully define each term
and briefly contrast with its partner. Whenever possible, supplement each
verbal definition with both a mathematical definition and an example.
Allocated time: 5 minutes each.

Page limit: one page per definition.

open market purchase vs. helicoper drop

"jump" variable vs. predetermined variable

rational expectations vs. long-run perfect foresight

random walk vs. white noise

primary fiscal deficit vs. reported fiscal deficit



II. LONG ANSWERS:
ANSWER THE FIRST QUESTION AND ONE MORE FOR A TOTAL OF TWO (2) QUESTIONS.
Allocated time: 1 hour per question.

LA1. Consider the following "Keynesian" term-structure model of a simple
fix-price economy.
        M = L(i, Y )     DY = phi(Y, E, F)         i = i* + DE/E
Here D is the differential operator, i is the interest rate, E is the real
exchange rate, Y is real income, M is the exogenous money supply, and F is a
"fiscal stance" variable.  Give an intuitive explanation of each of the
"structural" equations, including and explanation of the sign of each of the
partial derivatives.  Then consider the effects of a one time, permanent,
anticipated monetary expansion in the short run, intermediate run (i.e.,
dynamic adjustment), and long run.  Include a complete intuitive discussion
supported by detailed graphs.  Provide the complete algebra for the long-run
comparative statics.

LA2. Consider the following stripped down version of the Tobin (1969)
disaggregated model of the assets market:
        M = L(rB, 1/q, Y, M + B + qK)
        B = L(rB, 1/q, Y, M + B + qK)
        qK = L(rB, 1/q, Y, M + B + qK)
Here rB is the short-rate, q is Tobin's q, Y is exogenous real income, M is the
exogenous money supply, B is the exogenous bond supply, and K is the exogenous
supply of real capital. Comment on the assumptions of the model, including any
assumptions that allow us to write the model in this simplified form. What are
the effects of an exogenous decrease in the bond supply? Provide a detailed
verbal analysis, along with supporting graphs, and the explicit comparative
statics algebra.

LA3. Consider a simple version of the Friedman (1948) deficit finance model,
where the fiscal deficit is financed by money issue. (The case of 100% money
finance.) Are adjustment dynamics stable? Derive a stability condition
algebraically, illustrate graphically, and explain intuitively. What are the
short- run, intermediate-run, and long-run effects of a tax cut? Illustrate
graphically, and explain intuitively.  Also, provide the long-run comparative
static algebra.

LA4. What is Okun's Law and what is its significance? Does the empirical
evidence support the stability of this "law"? Be detailed and specific in your
discussion. Make explicit reference to your homework explorations as well as
detailed analyses based on required readings.

END OF EXAM