Question 2.    [20%]

Explain what happens in a liquidity trap.

Question 3. [20%]

Consider the following rule for the conduct of monetary policy, sometimes known as ‘Taylor’s rule’: the central bank should set its nominal interest rate to depend positively on the inflation rate and negatively on excess unemployment, defined as the actual unemployment rate        minus the natural rate of unemployment .

i)          Describe briefly the reasons for such a rule. What information would a central bank need to apply the rule?

ii)        Why does the rule focus on excess unemployment but not simply on the unemployment rate?

Question 4. [20%]

Explain the economic justification for central bank independence, that is, the separation of   monetary policy from direct political control. Hence, assess whether this separation will lead to the elimination of an ‘inflation bias’ .

Question 5. [20%]

"Wage bargaining determines the nominal, but not the real wage."

"Wage bargaining determines unemployment, but not the real wage."

Discuss.

Question 6.

The table below contains information on gross weekly earnings of Mr Median-Employee for 2014 - 2018.

a). What type of dataset we have in this table: time series, cross sectional or panel data?

b).  Calculate  the  mean  of  Mr  Median-Employee’s  gross weekly  earnings.  Explain  your calculations.

c) Calculate the range of Mr Median-Employee’s gross weekly earnings.

d). Calculate the variance of Mr Median-Employee’s gross weekly earnings. Explain your calculations.

e). Calculate the standard deviation of Mr Median-Employee’s gross weekly earnings. Explain your calculations.

A researcher decided to use data from The National Longitudinal Survey of Women 1988 (USA) to study the relationship between hourly wage and loyalty to employer (number of years spent working for the same employer).

Estimating regression equation

wagei =  +  tenurei +  i

where:

wagei      is the hourly wage measured in US dollars,

tenurei   is the number of years spent working for the current employer and  i  is an error term,

produced the following results:

f). What is the value of the OLS estimate of the coefficient on tenure? Provide an interpretation of this coefficient paying particular attention to the units of variables.

g). What is the value of the OLS estimate for the intercept? Provide an interpretation of this coefficient paying particular attention to the units of variables.

h). Test the hypothesis:  α = 0 against α ≠ 0 using a 95% confidence interval.