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Questions and Answers of
Banking
Interest rates fluctuate more than seems appropriate for their classical task of equating saving and investment. How did Irving Fisher explain this?
What are the similarities between the modern Monetarists and the Classical economists? How do they differ?
What is Say's law? What underlies it?
What is the Quantity Theory? How does it differ from the equation of exchange?
You are a Classical economist. What policy would you recommend to reduce inflation?
What determines the real rate of interest? How does it respond to changes in inflationary expectations?
What is the usefulness of a model when it ignores so much of what goes on in the real world?
Could the fiscal policies of the 1990s be characterized as Keynesian? How about Bush's 2003 tax cuts?
What effect did the stock market crashes of 1987 and 2001 have on consumption? Does the Keynesian theory of consumption account for this?
Does instability in investment spending indicate that business decision-makers are irrational?
Describe the main difference between Keynes and the Classics regarding how the economy operates.
What is the primary determinant of consumption spending in the Keynesian model? Does this differ from the Classical view?
How is the interest rate determined in the Keynesian model? How does monetary policy work in the model?
Consider a simple economy in which investment is constant and equal to $100 billion. There is no government or foreign sector, and the price level is constant. Consumption is C = $40 billion +
Consider a simple economy with exogenously determined taxes, investment, and government expenditure. T = $1,025 billion, G = $1,332 billion, and I = $650 billion. Autonomous consumption is $110
Why is the LM curve positively sloped? Isn't it against economic theory to have income and interest rates positively related?
An increasing number of people receive substantial income from variable-rate assets (for example, CDs that are rolled over regularly at maturity with a new deposit rate, functioning essentially as a
How would you portray the stock market crash of 2001 in terms of ISLM and AD?
By using the ISLM framework analyze the impact of these events on equilibrium income and interest rates: (a) An increase in money demand (b) A decline in autonomous consumption (c) An increase in
By using the ISLM model describe how the financial market influences the size of the simple Keynesian expenditure model. Under what conditions does complete crowding out occur?
In the ISLM model, under what conditions does monetary policy have the greatest impact on equilibrium income? Under what conditions is it completely ineffective?
In the ISLM model, do variations in the interest rate bring about full employment?
When banks were recently allowed to pay interest on checkable deposits, what did that do to the effectiveness of monetary policy?
Suppose income tax law is changed to make mortgage interest payments no longer tax deductible. How would that impact the effectiveness of monetary policy?
As a nation becomes more "financially sophisticated," how might this, by affecting the slope of the LM curve, make the economy more or less stable?
(From the appendix.) As our economy becomes more "open" (i.e., more closely tied to other economies in the world), how does this change the Fed's monetary policy targeting preference?
In the ISLM framework, what assumptions lead to impotent monetary policy? Are these conditions likely to occur in the real world?
Under what conditions does complete crowding out occur?
Describe the Keynesian position on the stability of the private sector.
What is the natural rate of interest, and what can cause it to change?
(From the appendix.) Do Keynesians prefer the Fed to target the interest rate or the money supply? Why not target both?
Using aggregate demand and supply, discuss an adverse oil shock, i.e., shortage of oil.
Does evidence of the past 20 years support the existence of a short-run Phillips curve tradeoff?
Do the stock market crashes of 1987 and 2001 indicate the inherent instability of the private sector?
Would a fixed-rate monetary policy have been effective in recent years? What kind of rule has the Fed appeared to follow recently?
What happened to the Phillips curve in the late 1990s?
What happened to the Phillip's curve in the late 2000s?
Discuss the Keynesian view of the transmission mechanism between money and aggregate demand. How does it compare with the Monetarist view?
From the Monetarists' perspective, how does the economy respond to a decline in exogenous investment?
How would Monetarists deal with rapid inflation? Could this bring on a severe recession?
"A faster-growing money supply leads to higher interest rates." Can this be?
What is the Keynesian rationale for a short-run Phillips curve?
Is the rise in inflation that began in 2008 only a monetary phenomenon, as purported by the Monetarists?
Are consumers and workers rational?
In what markets does the assumption of rational expectations appear to be most relevant?
Can the Fed influence inflationary expectations as part of a stabilization policy?
Should wages be made more flexible in some way?
Contrast the formation of rational and adaptive expectations. Are rational expectations always more accurate?
Describe the role of monetary policy in a world of rational expectations and perfectly flexible wages and prices.
What is the main Keynesian critique of New Classical macroeconomics?
What is the aggregate supply curve like in the New Classical macroeconomics? What does that imply about the Phillips curve?
Explain how fully anticipated monetary policy can affect real economic activity.
Does recent evidence support the assumption of stability in V1?
Why has V2 been far more stable then V1 in recent years?
In what ways does monetary policy affect household and business decision-making?
How are V1 and V2 likely to change in the next 20 years?
What do statistical investigations indicate are the primary determinants of money demand? What is meant by the stability of the money demand function?
Describe the lags in the conduct of monetary policy. Do these lags make monetary policy ineffective?
Can monetary policy change the real rate of interest?
Why do the Keynesians stress the use of V1 while the Monetarists stress V2?
"The unemployment rate figure released today was down sharply from last month's figure, three-tenths of a percent. This surprise caused bond prices to tumble." Explain the causation here.
What practical good is a lagging indicator like the unemployment rate?
The opening paragraph of Chapter 29 describes a seeming paradox: "bad news," in that the Purchasing Management Index fell, caused bond prices to rise. How can you explain that?
What are some criticisms of the way "employment" is measured?
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