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LUBS2610 Mock Exam II Revision Questions

1. An economy begins where Y=Yn. Illustrate graphically and explain the impact of a monetary policy shock (e.g., a fall in the money supply or a rise in the policy interest rate) that aims to reduce output in the economy in the Simple Classical Model, the Blanchard IS-LM-PC model with exogenous money, and the Blanchard IS-LM-PC model with endogenous money. Briefly explain why it is difficult to empirically estimate the impact of monetary policy on output due to the problem of endogeneity due to simultaneity. Discuss which empirical estimates of the impact of changes in monetary policy on output are related to which theoretical models emphasising which evidence is most important for policymakers in the UK today.

2. An economy begins where actual output equals potential output. Illustrate and explain the impact of a fall in energy prices in the IS-LM-PC model with endogenous money and anchored inflation expectations. Discuss the distributional impact of the fall in energy prices depending on whether the central bank, firms, or workers have the power to adjust the economy to keep inflation at its target rate after the fall in energy prices. With reference to readings and content in the module, discuss whether it is important to consider income distribution in macroeconomic analysis.