Eco201Pricniples of Macroeconomics Final Examination

ECO201Pricniples of Macroeconomics Final Examination
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1) Here’s a quote from Fed head Janet Yellen on at a meeting in Cleveland on July10 this year. (see www.federalreserve.gov then click news and events…Regarding inflation, as I mentioned earlier, the recent effects of lower prices for crude oil andfor imports on overall inflation are expected to wane during this year. Combined with furthertightening in labor and product markets, I expect inflation will move toward the FOMC’s 2percent objective over the next few years. Importantly, a number of different surveys indicatethat longer-term inflation expectations have remained stable even as recent readings oninflation have fallen. If inflation expectations had not remained stable, I would be moreconcerned because consumer and business expectations about inflation can become selffulfilling.
Explain why the FOMC is concerned not only about actual recent inflation ratesas measured by the CPI, but also about longer term inflation expectationsremaining “stable” In particular, what is the problem if inflation expectationsstart to converge to an opinion that inflation will fall to “0” or less? 4pts


2) Suppose the CFO of an American corporation with surplus cash flow had $100million to invest last July 15 and the corporation did not believe it would need toutilize these funds to retool or expand production capacity for 1 year. Suppose furtherthat the interest rate on 1 year CD deposits in US banks was .5%, while the rate on 1year CD deposits in England (denominated in British Pounds) was 2% at the time.Suppose further that the exchange rate at that time was $1.68 per British pound .
A) Suppose that now a year later the exchange rate is $1.55...