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natural resource economics

Questions and Answers of Natural Resource Economics

8. Does the FOMC engage in:(a) inflation targeting;(b) money supply targeting;(c) nominal demand targeting?
7. Why do you think the Fed currently has a reserve ratio for sight deposits but not for demand deposits?
6. Why does the Fed feel the need to maintain a system of reserve ratios when the Bank of England does not (apart from the small prudential ratio)?
5. If the Fed wishes to discourage banks from borrowing at the discount window except in emergencies, why does it keep the discount rate below the Federal funds rate?
4. Discuss whether the change in the balance of the objectives of the Federal Reserve over the years is a product of:(a) our greater knowledge of economics;(b) shifts in the balance of economic power
3. How centralized is the US central bank system now? Do the regional Reserve Banks have more or less power than the national central banks within the European System of Central Banks?
2. Consider the extent to which the current structure of the Federal Reserve System is a product of(a) geography;(b) history;(c) planning.
1. List all of the possible functions of a central bank and consider which ones can be adequately performed without a central bank being in existence.What particular problems were caused by the
The nature of the monetary policy practised by the Fed in recent years.
The extent to which and ways in which the Fed is independent and accountable
The way in which monetary policy is implemented by the Fed
The approach to monetary policy of the Federal Open Market Committee of the Fed
The structure of the Federal Reserve System
The story of the development of central banking in the USA
11. Look at the latest interest rate decision made by the ECB and explain it in terms of the first and second pillars of the ECB's monetary strategy.
10. Outline the arguments for and against fixed and variable rate tenders as the instrument for the provision by the central bank of liquidity to the banking system.
. When the ECB began operation at the beginning of 1999, how did it ensure that all members of the Executive Board would not end their terms of office at the same time? What would be wrong with the
‘A supporting argument was that the euro, as a broader-based reserve currency than the DM would be less likely to be driven artificially high on occasions.’Explain this statement. How did it
8. In the text, we say:
7. Why is the accountability of the central bank an important issue?MONETARY POLICY IN THE EUROPEAN UNION 415 monetary growth reference value target inflation rate fixed rate tender variable rate
6. In Table 13.1, compare and comment on the following sets of interest rates:(a) the bid yields for French, Netherlands and Greek bonds with a redemption date of 31 January 2004;(b) the bid yields
5. What does the Executive Board of the ECB do? What does it not do?
4. Do you think that the business cycles of Ireland are likely to be better synchronized with the rest of the euro area than are those of the UK? If so, given Ireland's long-standing economic links
3. Why might the business cycles of the UK not be synchronized with those of the 12 current members of the euro area?
2. In 13.2, we suggest that wage flexibility does not always provide an efficient means of adjusting to external shocks. What is the basis of that argument?
Why is the answer different in the two cases?
(b) in a very open economy?
(a) in a closed economy?
1. How useful is the exchange rate as an instrument of policy:
8. What useful forecasting information might there be in (a) company profit announcements and (b) corporate-government bond spreads. Explain how you might go about trying to extract that information.
What might this tell you about market expectations of future interest rate developments. Make explicit any assumptions you have to make.
7. You observe a yield curve which slopes upward for maturities up to two years and then slopes gently downward levelling off at 10 years and beyond.
THE MONETARY AUTHORITIES AND FINANCIAL MARKETS 373 money markets basis points conflict of objectives volatility capital asset pricing model fundamentals call options put options stockmarket insurance
6. Why might the yield on corporate bonds fluctuate relative to the yield on government bonds? What assumptions would you have to make in order to draw information about the economic cycle from these
5. Why might central banks be concerned about major price fluctuations in asset markets?
4. Why do international capital flows make the conduct of monetary policy more difficult?
3. What are ‘open mouth operations’? On what does their influence depend?
2. Why do central bank repo deals have such a large impact on money market interest rates?
1. Why do money market rates move so closely together?
Two central banks increase their refinancing rates by 50bp. The consequence in country A is that the whole yield curve shifts upward by c.50bp. In country B, the yield curve is unchanged at the short
How information can be derived from financial markets that can help in making economic forecasts.
How the behaviour of financial markets may place constraints upon central bank policy-making
Why central bank action on official short-term rates has so much leverage over market rates
11. Why does a rise in money’s own interest rate, ceteris paribus, tend to increase the rate of monetary growth?
10. Why might the presence of capital risk aversion in the bond market make the conduct of monetary policy more difficult?
9. Explain how capital adequacy requirements impose a tax on banking.
8. Why might giving the central bank responsibility for banking supervision make it more difficult for the bank to pursue an independent monetary policy with price stability as the primary target?
7. Why might responsibility for the government debt market inhibit a central bank’s conduct of monetary policy?
6. What features of the UK’s monetary policy framework contribute to credibility and openness?
5. Explain briefly why ‘credibility’ and ‘openness’ are desirable properties in the conduct of monetary policy.350 MONETARY ECONOMICS liquidity equation of exchange Quantity Theory of Money
4. Explain how central banks are able to set the level of short-term interest rates.
3. ‘It is not that the demand for lending has become less sensitive to changes in relative interest rates. If anything, it has become more so. The problem lies in the increasing inability of the
2. Outline the disadvantages of trying to limit the growth of money and credit by ‘direct’ controls.
1. Explain why policy makers have generally come to the conclusion that the only effective instrument of monetary policy is the short-term rate of interest.
11.In what senses is:(a) the Williamson-Miller target zone model Keynesian?(b) the McKinnon fixed exchange rate model monetarist?
10. Memory test: what is the Lucas critique? Where is it referred to in this chapter?
9. What is the relationship between purchasing power parity and the neutrality of money?
8. Is the assumption in the Dornbusch model of sticky goods market prices realistic? What about the other assumptions of the model?
7. Memory test: What are hysteresis effects? Where are they mentioned in this chapter? What point is made in relation to them?
6. Show on a Mundell-Fleming diagram the impact of:(a) a country revaluing its currency within a fixed exchange rate system;(b) a decision to widen the exchange rate bands within a fixed exchange
5. What meaning or meanings might be attached to the notion of the equilibrium exchange rate?THE OPEN ECONOMY AND MONETARY POLICY 309 target ranges spillovers perfect capital mobility synchronized
4. What factors are likely to determine leadership within a fixed exchange rate system?
3. Why does a wide band around fixed exchange rate parities (as with the 15 per cent band in use in the EMS between 1993 and the end of 1998) make life more difficult for currency speculators?
2.Why might a revaluation of a currency only temporarily reduce a Balance of Trade surplus?
1. How is the deflationary policy of a strong country transmitted through a fixed exchange rate system?
11. How are the following arguments discussed in this chapter affected, if at all, by an assumption of endogenous money?(a) the expectations-augmented Phillips curve(b) policy irrelevance(c) central
10. Is the argument over the independence of central banks being biased in favour of independence by the assumption of forward-looking market agents but myopic voters?
9. Why should central bankers be particularly adverse to inflation?
How then can hysteresis occur in labour markets? How can the existence of hysteresis in labour markets be used to argue against the neutrality of money?
8. The Chambers Twentieth Century Dictionary defined ‘hysteresis’ as:the retardation or lagging of an effect behind the cause of the effect: the influence of earlier treatment of a body on its
7. How useful do you think equilibrium models are in analysing a world that is never in equilibrium?
6. Why does ‘the combination of the rational expectations hypothesis and the assumption of continuous market clearing’ imply that output and employment fluctuate randomly around their natural
5. The model to which new classical economists applied rational expectations is described in the text as ‘market clearing’ and ‘monetarist’. How are these descriptions related? What must have
4. Why was the ‘shoe leather cost’ of inflation so called? What other costs are there of anticipated inflation?
3. Explain the basis of Milton Friedman’s simple rule of monetary policy —that the rate of growth of the money supply in a stable price environment should be kept equal to the rate of change in
2. Why is the natural rate of unemployment referred to as ‘natural’?
1. Where would the combination of inflation and unemployment in the UK in 2002 lie on the original Phillips curve diagram?
(e) With fixed exchange rates in an open economy, the relative prices of tradable and non-tradable goods change in response even to expected changes in the money supply.
THE TRANSMISSION MECHANISM OF MONETARY POLICY - II 219 However, these are only likely to have real effects if the price level changes are unexpected and this conflicts with the forward-looking
(ii) through distribution effects that might occur even with assets issued by the private sector, as creditors and debtors react asymmetrically to changes in the real value of debt.
(i) through changes in the real value of nominally denominated government assets provided they are considered to be net wealth; and
(d) Price movements in a model with asset holdings might produce real effects:
in the form of financial assets becomes less attractive.
(c) Higher inflation might have a positive impact on consumption as saving
(b) Changes in the rate of inflation might influence investment and, thus, the long-run rate of growth. For example, higher inflation makes holding real capital more attractive relative to money, and
(a) Progressive income tax structures push workers into higher tax brackets as inflation rises, affecting employment and output. Tax changes might also affect net-of-tax real rates of interest and,
Relatively small changes to the model can restore the power of governments to reduce output fluctuations at the cost of an increase in price fluctuations and, thus, remove the neutrality of money,
Modifications to the continuous market clearing model
attacks on the use of rational expectations.
criticisms of the natural rate hypothesis;
new Keynesian models that reject market clearing in the short run;
complete rejections of equilibrium models;
modifications to the model that accept continuous market clearing;
There have, thus, been many attempts to explore the weaknesses of the new classical model and to produce new explanations of the non-neutrality of money. We can divide these attempts into five groups:
As we mentioned in 8.1, a major problem for the new classical model is that money is not neutral in the short-run. It is widely accepted that a monetary shock does have an impact on output and
Is it reasonable to assume that inflation is more volatile at higher average rates of inflation? Can the rate of inflation also be volatile if the average rate of inflation is•low?
11. How useful is it in a Mundell-Fleming model to assume perfectly mobile international capital flows? What happens in the diagram with differently sloped BP curves?
10. Provide examples of the three types of capital goods distinguished by Brunner and Meltzer in formulating their version of the monetarist transmission mechanism.
9. How far ahead do people typically look in making market decisions?Provide examples of different forms of market behaviour in this regard.
8. If there is a ‘normal rate of interest’ in money markets, what factors might cause it to change?

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