1. 50 points Derive the log-linearized version of the NKPC. For the derivation of the NKPC you can take the optimal Calvo pricing problem (from Part II of the lecture dealing with the NKPC) as given. Your grade on this question will depend on the degree to which you demonstrate mastery and understanding of the intermediate steps in the derivation. That is, simply copy pasting or copying by hand from the lecture slides will not constitute an adequate answer. Provide economic intuition wherever applicable (e.g., why does firm-level marginal costs depend on aggregate variables?). Throughout your derivations, highlight the role of nominal and real rigidities in determining the slope of the NKPC.
2. 25 points “The economic distortions created by monopolistic competition are best dealt with by monetary policy.” Do you agree with this statement? Explain your answer. Credit will mainly depend on your reasoning.
3. 25 points “A drawback of cash-in-advance models of money demand is that their implications depend on which goods are cash versus credit goods.” Do you agree with this statement? Explain your answer. Your grade will mainly depend on your reasoning.