Question 1 1. Answer the following questions. a ) Indicate whether each of the following statements is True or False and

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Question 1
1. Answer the following questions. a
) Indicate whether each of the following statements is True or
False and provide a brief explanation for each answer (both must be
correct for mark to be awarded). I. According to Tobin’s marginal
q, a ratio greater than one indicates that new investments must be
made. (4 marks)
II. A decrease in government expenditure is a movement along the
IS curve. (4 marks)
III. An increase in the marginal propensity to consume results
in shifting the IS curve to the right and increases responsiveness
of output to future changes in interest rates. (4 marks)
IV. A decrease in direct and indirect taxes increases the real
wage by shifting the price-setting curve down. (4 marks)
V. An increase in the tax rate only shifts the IS curve to the
left. (4 marks) VI. Under rational expectations, expected inflation
rate equals past inflation rate. (4 marks)
b) Suppose the preferences of the central bank are represented
by the following loss function: L(yt, πt) = (yt – ye)2 + β(πt –
πT)2, where yt is the output level in period t, ye is the
equilibrium output level, πt is the current inflation rate in
period t and πT is the target inflation rate. In addition, the
Phillips curve is described as πt = πt-1 + α(yt – ye).
I. What can we say about the value of β if the central bank is
more concerned about output than inflation? (8 marks)
II. Will the monetary rule (MR) curve become steeper if both α
and β decrease? Explain.