**Monetary Economics**

The maximum word limit is 1500, not counting equations, tables or diagrams (if used). This should be more than enough to answer the required number of questions without waffle or unnecessary details.

Each question relates to material taught in this module. Your answers should be in your own words and reflect your own understanding.

Marks will depend mainly on the quality of your explanations. Where you use equations and/or diagrams to help in the exposition, you must add textual explanations of the equations/diagrams to demonstrate that you understand their role in helping answer the question.

Avoid paraphrasing from lecture notes and other material that has been made available on Moodle. Also avoid digressive and unnecessary detail.

The following criteria will be used in awarding marks (with the first being the most important)

Knowledge and Understanding: Does the answer show that you have understood the question in the correct context of all the material that was taught during the module?

How solid a grasp of the relevant material is reflected in the answer? Is there evidence of confusion about and misunderstanding of the material?

Analysis and Application: If the question is related to one of the models taught in the module, has the mathematics of the model, including derivations and notational detail, been properly outlined in the answer? If a diagram has been used in the answer, has the diagram been drawn and labelled correctly?

Communication and Structure: Is the answer clearly written? Does it flow smoothly and logically? If a diagram or equation is used in the answer, are they properly integrated into the text with an accompanying explanation?

**Question (1100 WORDS)**

**1. A. Explain the principle known as monetary policy ineffectiveness and discuss Lucas’ argument as to why it arises in an economy in which agents have rational expectations.**

**[70 marks]**

B. Lucas argues that while unexpected changes in the money supply can have real effects, such effects get quantitatively smaller the more volatile is the conduct of monetary policy. Explain the intuition behind this claim.

[30 marks]