Section A

A1. Discuss the criticisms of the New Keynesian coordination failure model, as a model of business cycles.

A2. Suppose, in the New Keynesian sticky price model, that there is destruction of some of the nation's capital stock. What should the central bank do in response? Explain.

A3. Define the neutrality of money, and explain why this concept is important.

A4. Explain how consumers' demand for alternative means of payment matters for the demand for money.

A5. List three of the key business cycle facts, and explain their significance.

Section B

B1. Suppose an economy is described by the Solow growth model. In particular, suppose the production function is Y=AK^1/2N^1/2. where A represents the level of total factor productivity. The task is to determine A based on the observed data. For simplicity, suppose that the level of A is known to be constant. Further assume:

1. The population (and the labor force) grows at the annual rate of 3%.

2. Capital depreciates at the annual rate of 7%.

3. The economy has converged to a steady state with a per capita income of $20,000.

4. The saving/investment rate is 20%.

(a) Derive an expression for the steady state capital/labor ratio in terms of A, s, n and g

(b) Using your answer in part (a), derive an expression for the steady state level of per capita income.

(c) Using your answer to part (b) and the data you observe calculate what A is.