Question

1. Show graphically how the economy would change if the government conducts a fiscal expansion considering the classical model with misperceptions. Show how ideology matters when deciding how large of a policy one should conduct.

2. Show graphically and discuss if the Federal Reserve should be honest, say nothing, or lie if they are going to conduct an open market purchase. What about with an open market sale?

3. Discuss conceptually what happens to GDP if unemployment increases 2% from its natural rate, use Okun’s Law for full credit.

4. Data comes out quarterly for GDP, but the Federal Reserve would like to use the Taylor’s Rule to give guidance on what to set the Fed Funds rate to. Show how you can augment the Taylor’s Rule to make it useful at the monthly level.

Answer 1