Economics
Answer questions in each section as instructed. You should use graphs wherever they would prove helpful, but all graphs must be accompanied by a verbal explanation. Where graphs are specifically asked for they are worth one half of the total points for the question. Be sure to label the graphs.
1. Briefly explain the historical events that led to the fall of the Classical model. Explain the economic implications of these events in terms of why they caused the model to fall into disfavor.
2. Keynes dramatically rethought how the demand for money was structured. What was the key difference between his formulation and that of the Classical model?
3. How did the modern Monetarist reformulation of the Quantity Theory? Combine the Cambridge version of the Quantity Theory of money and the Keynesian Money Demand function?
4. Explain the role of prices in the Keynesian model. Discuss both the original (simple) model and the later model that allows prices changes to occur. Specifically discuss the implications of this for the Keynesian view of the labor market.
5. “The Keynesian model is in disagreement with the classical model principally over what happens in the short run, not the long run.” Explain the nature of the comment and the underlying theoretical reasoning.
6. Explain what Monetarists mean by the concept of the “Natural Rate of Unemployment.” How does this relate to the classical concept of an economy always being at Full-employment?
7. In contrast to classical economics, Monetarists argue that changes in the stock of money will result in changes in real output in the short run, but that in the long run all such effects will be nominal. Use the Monetarist version of the Quantity Theory of Money to explain this conclusion.
8. The interest elasticity of money demand and the interest elasticity of investment demand are critical in understanding the relative effectiveness of Monetary and Fiscal Policy in the Keynesian model. Choose ONE OF THESE ELASTICITIES and show using IS/LM how it affects the relative effectiveness of Fiscal policy.
9.
The ultimate purpose of studying macroeconomics is to develop a strong yet flexible model which accurately reflects the operation of the economy so that sound policy decisions can be made.
Draft an essay in which you evaluate and explain the conclusions of the Classical, Keynesian and Monetarist models as to the effectiveness of Monetary Policy. Discuss the desirability and implications of pro-active monetary in the short run and long run. Identify and clarify the specific theoretical (or empirical) stipulations which led to the differing implications regarding these policy perspectives. (Use graphs to clarify and shorten your discussions by demonstrating the impact of an increase in the stock of money in each model. Specify the effects of the policy changes on the key variables Y, N, P, r, w.) Be specific and thorough.
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