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Hi, the exam sheet is due within 12 hours, please get back to me asap, thank you.
	
Document Preview: Final exam Instructions: This is a take-home exam consisting of three questions. Some important reminders:  You are free to consult notes, readings, and other materials in formulating your answers. BUT (a) it is expected that your answers will reflect your own ideas and that material will not be directly copied from other sources without attribution, and (b) collaboration is not permitted. Violations will be prosecuted. While there is no space limit for the exam, the quality of your answers matters more than their length. Writing excessively does not help your grade. Strong answers are accurate, insightful, thorough, and clearly expressed. They should also demonstrate strong command of key ideas, theories, research findings, and policy debates covered in this class.Assuming you are well prepared, it is not expected that writing this exam will take more than the class period.Your completed exam must be emailed to me -- by 6:00 am Tuesday  morning, Dec. 18thth, as a Word or .pdf file.* * *1.  Time inconsistencya)   When is a policy said to be time inconsistent? b)   Describe Barro and Gordon’s model of central bank decision making, writing down its       key equations. Making reference to these equations, explain why the central bank will       behave in a time-inconsistent way. c)   Show mathematically why an “inflation bias” arises in this model. What accounts for its       magnitude? What will the actual rate of inflation be? d)   Does the inflation bias lead to higher growth? Explain why or why not. e)   Define inflation targeting. Why is IT thought to represent a good solution to the timeconsistency problem?  f)  Based on material covered in this course, comment intelligently on the following: “If the       U.K., the European Central Bank and the U.S. Federal Reserve think 2% is the correct       value of inflation to target, then inflation-targeting emerging-market countries like Brazil,       Colombia, South Africa, and Chile should...

Robert · Accepted Answer

2. Short answers: 
a)  
Taylor rule in economics is a monetary-policy rule that represents how much the central bank 
should change the nominal interest rate in response to change in output, inflation or other 
economic conditions.  In particular, the rule says that for every one percent increase in inflation, the 
central bank is required to increase the interest rate by more than one percent.  
Some economist including “Geanaopolos” believed that monetary policy after 2001 was too 
expansionary. Too much money in the system fueled increase in assent price and not inflation 
which remained checked by global competition. Implicitly, it was realized that the Federal Reserve 
could have avoided both inflation and assent price bubbles if they has strictly followed the Taylor’s 
rule. Central bank gave too much importance to inflation targeting which allowed asset price to 
bust and then ultimately fall to result in financial crisis. 
In response to 2007-09 financial crisis, Federal Reserve cut interest rates sharply, and in some 
cases to the lower bound of nominal interest rate. The inability of this conventional monetary policy 
(to deplete the crisis) prompted central bank to use unconventional monetary policies such as; 
purchase of asset by the Federal Reserve or extensions of credit to private institutions, Quantitative 
easing etc. Since conventional monetary policy of reducing the interest rates were not effective in 
reducing the effect of financial crisis, the use of unconventional policies was justified and had been 
supported by many economists including “Geanaopolos”. 
b) 
Given that China is a fastest growing economy in the world and aims to double its current GDP by 
2020, it is most likely that China would overtake United States as the world’s largest economy by 
2020 if not by 2017. Given this projection, we can expect Chinese currency Renminbi, to displace 
the U.S.

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