Q. Essay Questions: (Make sure you thoroughly answer ALL parts of each question! Format requirements will be enforced.)
1. Japan has had a low inflation rate (measured at 0.1% per year) while Venezuela and Iran have experienced inflation rates of 18.7% and 17% respectively, and Zimbabwe's inflation rate has been measured at over 12,500% . Is this information sufficient to give us reason to believe that expansionary monetary policy will have greater real effects in one (or some) of these countries than in others? If so, explain and show the order in which you believe the four named countries be likely to experience real effects from expansionary monetary policy (list from "most likely" to "least likely"). If this information is not sufficient, what additional information would you need? Obtain that information and show how you would use it to predict the likelihood of real effects from expansionary monetary in each of these countries.
2. Using the "New Keynesian" model, suppose households increase their rates of savings (due to some exogenous event). What will happen to real GDP and to the amount of labor employed, aggregate consumption, and aggregate savings? Compare these results to those predicted by the equilibrium business cycle model developed by Barro throughout the text.