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BEEM120J

May 2021

MACROECONOMICS OF MONEY AND FINANCIAL MARKETS

Question 1

Outline a two-period model of consumption based on intertemporal behaviour.  Provide an interpretation for the consumption Euler equation and derive the consumption function.     Introduce a government budget constraint and show how your model implies Ricardian     Equivalence.

Question 2

Consider the Barro-Gordon model. Compare the rate of inflation when a central bank acts  under discretion and when it acts with commitment. Explain why the outcome under           commitment results in a relatively lower level of social loss.  Use a diagram to support your answer.  Can the appointment of a conservative central banker reduce social loss?

Question 3

Consider the Mundell-Fleming model in which a country operates a freely floating exchange rate system and there is perfect capital mobility.  Explain the effects of an expansionary       fiscal policy on the macroeconomy. What are the implications of assuming capital is not       perfectly mobile?