Student Name: 1Econ 352 Fall 2011Final Exam (Form 1)Instructor: Kanda NaknoiDecember 15, 201119:00-21:00Instructions1. Use a #2 pencil to mark the following in the answer sheet.• Mark your last name, your first name and your student identification number.• As the section number, mark “0001” if you are enrolled in the 9:00 section.Mark “0002” as the section number if you are enrolled in the 10:30 section.• Mark “01” as the test/quiz number.2. Write your name on the space provided in the top left corner of every page of thequestion sheet.Student Name: 2Part I (30 points)Instruction: Answer whether the following statements are true or false. If you answertrue, mark “A” in the answer sheet. Mark “B” otherwise. (1 point each)1. A temporary fall in margin propensity to consume in a small-open economy increasesthe national saving in the short run.2. A temporary fall in margin propensity to consume in a small-open economy increasesthe real interest rate in the short run.3. When countries run current account surpluses, they are net exporters in the worldgoods market.4. When countries run current account surpluses, they are net exporters in the worldcapital market.5. An open-market sale of government bonds increases the monetary base for a givenlevel of money multiplier.6. An open-market purchase of government bonds increases the money multiplier.7. In the long run, a rise in inflation expectations raises the nominal interest rate.8. In the long run, countries with higher money growth rate than output growth rateexperience an increase in the price level.9. In the long run, countries with higher money growth rate than output growth rateexperience an increase in the velocity of money.10. A temporary increase in oil price causes the the Phillips curve to shift upward for ashort period.11. A temporary increase in oil price causes the the AS curve to shift upward for a shortperiod.12. The central bank can stabilize both output and inflation in response to a temporaryfall in net exports by using a temporary money expansion.13. The central bank can stabilize both output and inflation in response to a temporaryfall in net exports by using a temporary money contraction.14. The central bank can stabilize both output and inflation in response to a temporaryoil shock by using a temporary money expansion.15. The central bank can stabilize both output and inflation in response to a temporaryoil shock by using a temporary money contraction.Student Name: 316. Without Ricardian Equivalence, a temporary fiscal expansion has the same quali-tative impact on inflation as a temporary monetary expansion.17. Without Ricardian Equivalence, a temporary fiscal expansion has the same quali-tative impact on output as a temporary monetary expansion.18. Without Ricardian Equivalence, a temporary fiscal expansion has the same quali-tative impact on exchange rate as a temporary monetary expansion.19. With Ricardian Equivalence, the fiscal multiplier is equal to the money multiplier.20. With Ricardian Equivalence, a payroll tax cut has a positive effect on output.21. With Ricardian Equivalence, a capital gain tax cut has a positive effect on output.22. Under a flexible exchange rate system, a permanent increase in the inflation rate inthe US causes the dollar to appreciate in the long run.23. Under a flexible exchange rate system, a temporary increase in the US interest ratecauses the dollar to appreciate in the short run.24. Under a flexible exchange rate system, an anticipation about a temporary rise inthe US interest rate causes the dollar to appreciate in the short run.25. Under a fixed exchange rate system, maintaining free capital mobility implies thatthe central bank must sacrifice independent monetary policy.26. Under a fixed exchange rate system, a rise in the foreign interest rate reduces theforeign exchange reserves.27. Consider the two-period model of consumption with preferences for consumptionsmoothing. Households whose current income is higher than future income becomeborrowers.28. Consider the two-period model of consumption with preferences for consumptionsmoothing. A rise in the real interest rate causes households to increase currentconsumption.29. Consider the two-period model of consumption with preferences for consumptionsmoothing. A rise in current income causes households to increase current con-sumption.30. Consider the two-period model of consumption with preferences for consumptionsmoothing. A rise in future income causes households to increase current consump-tion.Student Name: 4Part II (70 points)Instruction: Answer the following questions and depict diagrams as required.1. (10 points) What is inflation tax? How is it collected? How does it influence thecentral bank’s balance sheet?Student Name: 52. (10 points) Suppose consumers in Mexico permanently reduce demand for US goods.Use the AD-AS model to explain effects of this event on output and inflation rate inthe US, in both the short run and the long run. Next, assume that the US centralbank follows the Taylor rule. Use the MP curve to explain the effect of this eventon the US real interest rate in the short run and in the long run.Student Name: 63. (10 points) Suppose the goal of central banking is to stabilize output and inflation.Suppose that a hurricane has damaged oil refineries in the south, and it takes 6months to repair them. Can the US central bank achieve its goal by using monetarypolicy? Use the AD-AS model to explain your reasons.Student Name: 74. (10 points) The US central bank engaged in a permanent money contraction in1980-1986. Use the AD-AS model to explain effects of this event on inflation andunemployment in the US in both the short run and the long run.Student Name: 85. (10 points) The Obama administration responded to the recent financial crisis by alarge-scale temporary fiscal stimulus, but the unemployment rate is still higher thanthe level before the crisis. Some economists have proposed that the ineffectivenessof the fiscal stimulus is caused by Ricardian Equivalence and a supply-side tax cutis a better alternative. Do you agree with them? Explain your reasons using theAD-AS model.Student Name: 96. (10 points) The US central bank responded to the recent financial crisis by successiverounds of money expansion. Suppose that past money expansions caused the publicto anticipate further money expansions in the future. Explain short-run effects ofthis anticipation on the yen-dollar exchange rate