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Economics 365

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					Economics 341                                                                              Professor Rafferty
Money & Banking                                                                            Spring 2005


                                   POSSIBLE FINAL EXAM ESSAYS

Two of these essays will appear on the final exam. Each of the essays that appear will count as twenty five
points (out of one hundred points) on the final exam. The final exam is two hours long so you should plan
to write for thirty minutes on each essay question. One of the criteria that I will use in grading your essays
is how well you use information from Laurence Meyer’s book A Term at the Fed to defend your thesis.
Speaking of which, each essay must have a thesis which you defend in the body of the essay.

To prepare, you should make outlines for your answer to each essay question and study from the outlines. I
would also recommend that you take fairly detailed notes on each chapter as you first read the book. This
will make it easier for you to find material that is relevant for each individual essay question.

You received these essay questions on the first day of class so your answers should reflect thought on your
part. I do not have a set length requirement for the essays but you should spend thirty minutes on each
essay. The length and quality of your essay should reflect that fact.


1. On page xvii of the Preface, Laurence Meyer writes,

         I will refer on occasion to a specific set of principles – summarized by the Taylor rule –
         that identifies how monetary policy should be set in order to promote full employment
         and price stability. Specifically, the Taylor rule identifies how aggressively monetary
         policymakers should adjust the federal funds rate in response to movements in output and
         inflation.

         But while such a simple set of principles (i.e. a monetary policy rule) is useful in
         explaining the strategy of monetary policy, monetary policymakers in practice have to be
         flexible enough to respond to unusual shocks and unexpected developments. It is, as a
         result, impossible to write down a simple set of principles that could cover every
         contingency. So this book is both about the principles that provide a point of departure
         for the strategy of monetary policy and the judgment that monetary policymakers
         inevitably have to exercise in the conduct of monetary policy in practice. Parentheses
         added.

What does it mean for a central bank to base monetary policy upon discretion? What does it mean for a
central bank to base monetary policy upon a rule? More specifically, what is the Taylor rule?

Do you agree with Meyer’s claim that “monetary policymakers in practice have to be flexible enough to
respond to unusual shocks and unexpected developments.” Explain using details from the A Term at the
Fed: An Insider’s View.




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2. During Laurence Meyer’s tenure as a governor of the Federal Reserve Board, he was influenced by the
NAIRU model while others were influenced by visions of a “New Economy.”

Explain these two views of the economy. Are they mutually exclusive views of the economy?

Describe the practical problems with using the NAIRU model for determining monetary policy. Was the
model working well during the late 1990s? Why or why not? Use the aggregate demand and aggregate
supply and Phillips curve models from class in your answer.



3. The Federal Reserve is charged with attaining “price stability.” How does Alan Greenspan define price
stability? Is price stability necessarily the same thing as zero percent inflation? Explain. Is zero percent
inflation necessarily a good thing? Explain.



4. On page 56 of A Term at the Fed: An Insider’s View Laurence Meyer notes that Alan Greenspan believes
a first move (i.e. a change in the direction of monetary policy) must meet a higher standard of proof than
subsequent changes. Defend Greenspan’s view.



5. What is a “soft landing?” Describe the macroeconomy for the United States from 1999 to 2001. Did the
Fed achieve a soft landing? Why or why not? Use the aggregate demand and aggregate supply and
Phillips curve models from class in your answer.



6. What is a financial market bubble? Did one exist in the late-1990s? Should the Fed have moved to slow
the increase in stock prices during the late-1990s? Why or why not? Use the aggregate demand and
aggregate supply and Phillips curve models from class in your answer.




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