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(1) [14 points] IS-LM Model Assume the following model of the closed economy in the short run, with the price level (P) fixed at 1.0: C = 0.5(Y T) T = 1, 000 I = 1, 500 250r G = 1, 500 Md P = 0.5Y 500r Ms = 1, 000 (a) [2 points] Write a numerical formula for the IS curve, showing Y as a function of r alone [Hint: Substitute out C, I, G, and T] (b) [2 points] Write a numerical formula for the LM curve, showing Y as a function of r alone [Hint: Substitute out M/P] (c) [2 points] What are the short-run equilibrium values of Y , r, and national saving (S)? (d) [2 points] Assume that G increases by 1,500 (i.e., G = 3, 000). By how much will Y increase in short-run equilibrium? (e) [3 points] You are the chief economic adviser in this hypothetical economy. Do you believe that fiscal policy is more potent than monetary policy? Briefly discuss [Hint: Use the slope of IS and LM curve in (a) and (b)] (f) [3 points] Write the numerical aggregate demand (AD) curve for this economy, expressing Y as a function of P (2) [10 points] Classical models in the Long Run During early 1980s, President Reagan proposed to increase defense spending and decrease taxes. Table 1 shows how the policies affected the U.S. economy. Use the Classical Model to answer the following questions (a) [3 points] Use the closed economy model and illustrate graphically how the model predicts national saving (S), investment (I), real interest rate (r), net export(NX), and real exchange rate () in the long run (b) [2 points] Are the data in the table consistent with model predictions that you found in part (a)? Briefly discuss

(c) [3 points] Now use the small open economy model and illustrate graphically how the model predicts national saving (S), investment (I), real interest rate (r), net export (NX), and real exchange rate () in the long run (d) [2 points] Are the data in the table consistent with model predictions that you found in part (c)? Briefly discuss (3) [6 points] Open Economy in the Short Run Economic expansion throughout the rest of the world raises the world interest rate. Use the Mundell-Fleming (IS LM ) model to illustrate graphically the impact of an increase in the world interest rate (r ) on the nominal exchange rate (e) and level of output (Y ) in a small open economy with a floating-exchange-rate system (4) [10 points] The Model of AD and AS Assume that an economy is initially operating at the natural rate of output (Y ). A short-run aggregate supply equation is given by Yt = Y + (Pt P e t ), where Y is output, P is the price level, P e is the expected price level, and > 0 (a) [2 points] What is the slope of the aggregate supply curve? (b) [3 points] According to the sticky-price model, the value of depends on the fraction of firms with sticky prices. Other things being equal, if a greater proportion of firms follows the sticky-price rule, what happens to the slope of the AS curve? (c) [5 points] Use the model of aggregate demand and aggregate supply to illustrate graphically the short-run and long-run effects on price and output of an unexpected expansionary monetary policy change 3 (5) [10 points] The Phillips Curve Suppose that an economy has the Phillips curve t = e t 0.5(ut 0.06) (a) [2 points] What is the natural rate of unemployment (u n )? (b) [4 points] Use the Phillips curve diagram to illustrate graphically how the inflation rate () and unemployment rate (u) change in the short run to an unexpected expansionary monetary policy (c) [4 points] Use the Phillips curve diagram to illustrate graphically how the inflation rate () and unemployment rate (u) change in the short run to an expected expansionary monetary policy (6) [10 points] Consumption Theories (a) [3 points] What were Keynes's three conjectures about the consumption function? (b) [2 points] What is the consumption puzzle? (c) [3 points] How does the Permanent Income Hypothesis (PIH) resolve the puzzle? (d) [2 points] Demographers predict that the fraction of the population that is elderly will increase over the next 20 years. What does the Life-Cycle Hypothesis (LCH) predicts for the influence of this demographic change on the national saving rate? That is, will the national saving rate increase or decrease? Why?

[10 points] Money Supply and Inflation To increase tax revenue, the US government in 1932 imposed a two-cent tax on checks written on deposits in bank accounts (In today's dollars, this tax was about 25 cents per checks) (a) [2 points] How do you think the check tax affected the currency-deposit ratio? Briefly explain (b) [2 points] Briefly discuss how this tax affected the money supply using the model of the money supply under a fractional-reserve banking system (c) [3 points] Now use the IS LM model to discuss the impact of this tax on the economy in the short run. Was the check tax a good policy to implement in the middle of the Great Depression? (d) [3 points] Explain how this tax influenced nominal interest rates and inflation rates in the long run using the Quantity Theory of Money (QTM) and the Fisher effect 4 Part D (10 points) If you are a Graduate student, you should answer the following questions. This is a bonus question for Undergraduate Students (8) [10 points] Suppose that the central bank strictly followed a rule of keeping the real interest rate at 3% per year. That rate happens to be the real interest rate consistent with the economy's initial equilibrium (a) [5 points] Assume that the economy is hit by a money demand shock only. Under the central bank's rule, how will the money supply respond to a money demand shock? Will the rule make aggregate demand more stable or less stable than it would be if the money supply were constant? (b) [5 points] Assume that the economy is hit by IS shocks only. Under the central bank's rule, how will the money supply behave? Will the interest-rate rule make aggregate demand more stable or less stable than it would be if the money supply were constant?

A. Load the csv file into a dataframe "pairs".

B. Some concepts in foreign exchange: when we say trading a currency pair EUR/USD, we mean the Euro price of a Dollar, where in the format X/Y, X is called "foreign_ccy" and Y is called "domestic_ccy".

C. Learn how to use str_split() function in "stringr" package. We want to split the values in the first column "currency_pair_name". For example, in the first row, the first column's value is "EUR/USD", after you split by "/", you get ("EUR", "USD"). Then take the first item from this vector, in this example it is "EUR", which is the "foreign_ccy". Assume you have the input string "EUR/USD", write R code with str_split() to return "EUR"

D. Use the family of apply() functions, modify your code of problem 3 to return a list of "foreign_ccy" from the "currency_pair_name" column.

Due to his long hours as a junior broker with Stampson, Clarke & Weinstein, a prestigious blue-chip brokerage firm on Wall Street, Mike Keaggy was put on some substantive accounts that pertained to the firm's top corporate clients. Just several weeks ago, Mike's boss, Harry Stampson, a named partner, approached Mike about taking on the Pfeifer account. The Pfeifer Corporation, a closely-held corporation of several brothers and sisters of a wealthy California family, had generated approximately $1.7 million in annual fees over the past ten years, and was an account that was assigned to promising your workers with an ability to run profit for the firm. Harry added, "I run a tight ship around here and look for only one thing: your ability to add value to our bottom line. I don't like creative-types. Everything we do here has a purpose and is tried-and-true."

Fred and Amy, two junior associates, were assigned to Mike's account. Amy, a Harvard grad, had already made a name for herself by being aggressive with numbers. Fred, a UCLA grad, was reserved and liked to proceed methodically through a project. He wasn't like around the firm but was loyal to his partners.

Fred had consulted the Codes of Conduct and Code of Ethics on other accounts, and wanted to know on what issues these documents related on the Pfeifer account. The brothers and sisters are directors and officers charged with fiduciary duties in running the corporation. One of the directors, Sue, had recently purchased some property worth $25 million without getting permission from the board. Mike read a note on the memo that read, "Hide this purchase--Pfeifer doesn't want this transaction to show on financials. We don't want other clients to know about this--could negatively impact investment advice. H.S." Mike showed Amy and Fred this note. Fred objected, saying that the Codes prohibit hiding such information. Amy said it probably will never be discovered. Answer the following questions:

1. What options do Mike, Amy, and Fred have in terms of the note? In your answer, discuss issue management theories and strategic management approaches.

2. What ethical system(s) describes the corporate culture at SC&W? Is this an example of Immoral Management, Moral Management, or Amoral Management, according to Lynn Sharp Paine's models? Explain.