Berkeley 101b Fall 2006 Website

Here are some rough solutions for you to check your answers on the practice final.  I'll be holding my last office hours tomorrow (Monday) for any remaining questions, etc.

Solutions to Practice Final

-Joe

Professor DeLong encouraged us to add interesting things to the blog, so in that spirit, Econbroswer has posted a follow-up to the post we read last month on possible explanations of the inverted yield curve:

http://www.econbrowser.com/archives/2006/12/the_yield_curve_3.html.

They suggest that large foreign holding of US bonds may be holding down the term premium and therefore making the yield spread negative.  This effect, according to a recent econometric study cited on the post, may be causing up to a one percentage point decrease in the 10-year note's nominal yield.

The blog's recent topics also include China and the strength of the dollar, for anyone looking to read more about other topics we've been studying.

-Jeff Naecker

I will be holding office hours at the following times:

Thursday 12/7 -- 11:30am-1:00pm -- 508-7 Evans
Friday 12/8 -- 10:00am-11:30pm -- 508-5 Evans
Monday 12/11 -- 11:30am-1:00pm -- 508-3 Evans

-Joe

Final exam to be given in 534 Davis, at 12:30 PM on Wednesday, December 13.

"Where is Davis?" you ask. I have no idea. Davis used to be where the gigantic hole now on Hearst now is.

UPDATE: Ah. They only tore down half of Davis. What I thought was the back half of Bechtel is actually the front half of Davis.

And here is the practice final exam: http://delong.typepad.com/print/20061205_mock_final_101b.pdf

ECONOMICS 101B: FALL 2006: PROBLEM SET 9

 Due December 7, 2006

Short Answers:

1. What is the “Lucas critique”? How would the Lucas critique suggest that you should design a policy to try to reduce inflation from 10% per year down to 2% per year?

2. What is "dynamic inconsistency"? Why does dynamic inconsistency strengthen the case for having policy rules rather than leaving economic policy to the discretion of authorities?

3. What can you say about under what circumstances the Federal Reserve should focus on keeping the interest rate as opposed to the money stock stable?

4. Why do economists today tend to believe that monetary policy is superior to discretionary fiscal policy as a stabilization policy tool? In what circumstances that you can imagine would this belief be reversed?

5. Suppose that the level of investment spending does not depend at all on the interest rate. Does this mean that the IS curve is vertical? How then can central bank changes in the real interest rate effect the level of real GDP in the sticky-price model?

6. Briefly, why was the Great Depression so great?

7. Briefly, why should we (or should we not) worry about the fact that the U.S. is running a very large trade deficit?

8. Briefly, what conclusions can we reach from the low level today of U.S. long-term interest rates?

Background readings:

Douglas Staiger, James H. Stock, Mark W. Watson (2001), "Prices, Wages and the U.S. NAIRU in the 1990s" <http://nber.org/papers/w8320>.  
Douglas Staiger, James H. Stock, Mark W. Watson (1996), "How Precise are Estimates of the Natural Rate of Unemployment?" <http://nber.org/papers/w5477>.  
Gayle Allard, Peter H. Lindert (2006), "Euro-Productivity and Euro-Jobs since the 1960s: Which Institutions Really Mattered?" <http://nber.org/papers/w12460>.  
Olivier Blanchard (1998), "Revisiting European Unemployment: Unemployment, Capital Accumulation, and Factor Prices" <http://nber.org/papers/w6566>.

Background reading: A false Cassandra:

Nouriel Roubini  and Brad Setser (2004), "The US as a Net Debtor: The Sustainability of the US External Imbalances" (New York: Stern School of Business) <http://pages.stern.nyu.edu/~nroubini/papers/Roubini-Setser-US-External-Imbalances.pdf>.

Due to the Thanksgiving holiday, there will be no sections the week of November 20th.  This includes the 9am section on Monday 11/20.  We will meet again on Monoday November 27th.

Have a good holiday!

-Joe

Write between 600 and 1000 words on the following topic:

Pick any of the major points--theoretical or empirical or applied--covered in this course. Write how you would explain what you have learned on that point in this course to somebody completely ignorant of economics.