Exam 13 July 2020

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Macroeconomics of Finance, 13 July 2020 (Prof. A. Florio) Exercise1 Suppose the economy is initially at a long-run equilibrium. Then the Fed increases the money supply. Explain the short-run and the long-run effects of this policy on GDP, unemployment, and inflation using these three models: IS-LM, AD-AS, and the Phillips curve, when: a) any resulting inflationis unexpected. b) any resulting inflation is expected. (Provide a graphical analysis for each of the three models in both cases.) Peter Bofinger recently (15 June 2020) claimed: “The Covid-19 pandemic has led to an enormous slump in economic activity worldwide. At the same time, fortunately, governments and central banks have implemented economic stimulus measures unprecedented in economic history. (…) On the whole, there is a greater risk that the pandemic will lead to deflationin the global economy.” c)Commenting on this sentence, and employing the model you judge more appropriate, tell why the Covid- 19 crisis is expected to be deflationary rather than inflationary. d)Stephen Moore, on 13 of May, titles his article on the Financial Times: “Deflation is the real killer of prosperity”.Do you agree? Explain. Exercise2 Consider the Bernanke-Blinder (1988) model. In this model banks hold bonds B, loans L and reserves R as assets, and have deposits D as liabilities. Reserves are equal to the legal minimum reserve requirement R = τD, where τ = 1/3. Furthermore, DD = Y – 0.5iB, demand for deposits, with Y real output, iB the bond interest rate. LD = Y – 0.25(iL − iB), demand for loans, with iL the loan interest rate. LS = 0.75(D − R), supply of loans. Y = 60 – 0.25(iL + iB), goods market equilibrium. a) Assuming that currency is zero, find the supply of deposits in the money market. b) Write the LM curve. c) Employing…