1. Define the following concepts: interest rate corridor, policy rate, asset-liability of a bank, net

worth, monetary transmission mechanism, expansionary and contractionary monetary policy,

procyclical and countercyclical policy, hyperinflation.

2. Provide a summary of how the monetary policy affects the aggregate demand and inflation.

3. Define the following concepts: fiscal multiplier, automatic stabilizers, discretionary fiscal policy,

indirect vs direct taxes, progressive tax, income tax, corporate tax, budget balance, public debt.

4. Explain why the fiscal multiplier implied by an AS-AD model would be lower than the one

implied by the aggregate expenditure model.5. Explain how a permanent increase in the government expenditures as a share of GDP may

change the composition of output.

6. Explain the intuition behind the Taylor rule. Can the relative size of the coefficients on the

inflation gap and output gap change across countries? Why don't the central banks adopt a rigid

Taylor rule? Provide your reasoning.

7. Using the AS/AD model, show how a timely fiscal policy would bring a recession to end.

8. Explain how a wrongly timed fiscal stimulus may lead to a procyclical policy.

9. Explain how the following tax changes would affect incentives to work, save, invest, and start a

new business, respectively. i) A decline in income tax ii) A reduction in financial income tax

iii) A reduction in corporate tax iv) Exemption of corporate tax for new start-up companies.

10. Suppose the government implements tax changes to boost the innovation and productivity in

the economy. How would that affect LRAS? Show the eventual impact on the output and prices.