Obey page limits: concision is graded. If a question has multiple parts, indicate exactly where you answer each part. This exam has three (3) sections; be sure to follow the directions for each section.

ANSWER ALL OF THESE. Carefully define the following terms. Whenever possible, give a mathematical and a verbal definition. Allocated time: 5 minutes each.

Rational Expectations "in the sense of Muth''	Fischer-Gray model
Seigniorage	Inflation Tax
Natural Rate of Unemployment	Exchange Rate Overshooting
Regressive Expectations	Golden Rule

DO ANY TWO (2) OF THE FOLLOWING QUESTIONS. ALL QUESTIONS ARE EQUALLY WEIGHTED. Allocated time: 20 minutes each.

1. What was Sargent's (1971) critique of estimates of the long-run tradeoff between inflation and unemployment?

2. Consider a forward-looking consumer whose consumption follows a random walk. Derive the relationship between changes in consumption and changes in expected earnings. State the intuition underlying the derivation of your result.

3. What is the effect of an anticipated tax cut in the term-structure model under rational expectations? (No algebra.)

4. Consider a classical economy with a fiscal deficit, which is partially bond financed, under rational expectations. Is the current inflation rate determined by the size of the fiscal deficit? (No algebra required.)

ALL STUDENTS MUST ANSWER ONE (1) OF THE FOLLOWING QUESTIONS: ALL QUESTIONS ARE EQUALLY WEIGHTED. Answers to these questions should be relatively broad in scope and should include extremely detailed algebraic developments along with full economic intuition. Allocated time: 60 minutes each.

1. Consider an infinitely lived representative consumer with inelastic labor supply. As an exercise in dynamic programmming, derive the core predictions of the neoclassical model of consumption behavior. Are these predictions supported by the aggregate data? Make extensive reference to the empirical literature and your own homework on this topic.

2. Consider a simple two-generation overlapping-generations economy with no money and inelastically supplied labor. What is the effect of a pay-as-you-go social security system on long-run per capita income? Evaluate this normatively.