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natural resource economics

Questions and Answers of Natural Resource Economics

7. Draw IS/LM diagrams with differently sloped LM curves and consider the impact in your diagrams of assuming different slopes.
6. Provide examples from everyday of life of different forms of expectations— static, regressive, extrapolative.
(b) Rank them in terms of liquidity among the following range of assets:money, houses, jewellery, treasury bills, gold bullion, long-term bonds maturing in one year’s time, life insurance policies.
(a) Why are they ‘relatively illiquid’?
5. The text describes consols (non-maturing bonds) as ‘relatively illiquid’—relative to money.
(a) rich and poor; (b) borrowers and lenders; (c) old and young?THE TRANSMISSION MECHANISM OF MONETARY POLICY 205 transmission mechanism of monetary policy interest rate control monetary base control
4. How are interest rate changes likely to affect the distribution of income between:
(a) in the short run; (b) in the long run?
3. What difference would it make to the strength of UK monetary policy if all mortgages were fixed-interest-rate loans:
(c) Would things be any different now?
(b) Was the fear justified?
(a) What was the basis of this fear?
2 Following a stock exchange crash in 1987, there was a temporary fear of a recession because of an anticipated reduction of consumption expenditure.
1. How might the impact of a change in UK interest rates be affected by:(a) demand conditions in the USA;(b) the expected future policy of the Federal Reserve Board?
How does the role for the demand for money envisaged here by Laidler compare with that argument?
In Section 4.4, we consider the view that the demand for money is a constraint on the demand for credit since credit cannot create money unless the resulting deposits are willingly held. We dismiss
It is sometimes said that, in Keynesian models, increases in the money supply influence investment but not consumption but in monetarist models, both consumption and investment are affected. What
Which of the theories of the demand for money considered in Chapter 5 suggests the possibility of a highly interest-elastic demand for money?
Are the effects of a reduction in interest rates likely to be the exact reverse of the effects described above for an increase in interest rates?
Can you think of situations in which an increase in domestic interest rates will not cause an increase in the value of the domestic currency?
Why might firms take actions leading to reductions in employment when the central bank does not change the rate of interest?
(b) Why might they not fall?
(a) Why are equity prices likely to fall following an increase in interest rates?
Discuss this statement in relation to the question of the value of econometric testing.
Does the second of these lead you to think differently about the choice of scale variable in the demand for money function?10. ‘…the main prima facie objection to the application of the method of
(b) households base their consumption and savings decisions on current income rather than wealth.
(a) it might be rational (rather than simple money illusion) for workers to make labour supply decisions based on relative money wages rather than real wages;
9. In the light of Keynes’s view about the difference between risk and uncertainty, explain each of the following ideas from Keynes:
8. What is implied about the relationship between money and interest rate when money is made the independent variable and interest rate the dependent variable — that is, when the demand for money
7. Explain each of the effects suggested in Box 6.3.
6. Why might it be reasonable to replace an expectational variable in an equation with a dummy variable or a trend term? What is being assumed when a trend term is used?TESTING THE DEMAND FOR MONEY
‘However, the closeness of substitutes varies with the definition of money, which itself varies as innovations in very liquid assets take place. Even with a constant definition of money, the choice
5. Explain the following statement from the text and give some examples:
Does the assumption that the time lag on the income term should be the same as that on the interest rate term cause any problems?
4. Consider the equation:mt = θβ0 + θβ1yt + θβ2it + θv + (1 − θ)mt-1
3. In what way is it favourable to monetarist views if:(a) the interest elasticity of the demand for money is low?(b) the demand for money is correctly specified in real terms?
2. Consider the list of variables that the text suggests might be included in an equation for the demand for money based on theory. Link each variable to a particular theory discussed in Chapter 5.
1. It is widely accepted in science that it is not possible through empirical testing to prove anything. All one can do is to refute hypotheses. How scientific, then, is the testing of the demand for
Sceptical views regarding the stability of the demand for money function
The buffer stock approach to the demand for money
Econometric explanations of the instability shown in testing in the 1970s and 1980s
The possible link between financial innovation and tests of the demand for money
The problems that arose with the stability of demand functions in the 1970s and 1980s
The form and results of early demand for money tests
The difficulties in carrying out any demand for money test
The weakness of the link between the theory of the demand for money and the testing of it
12. In Chapter 1, we mentioned the view that the value of money in exchange arises because of the existence of incomplete information in markets.How does this relate to shopping time models of the
11. What are the particular characteristics of monetarist models of the demand for money?
10. Why did the testing of the demand for money grow rapidly at the expense of theorizing about the demand for money after Friedman published his theory?
9. Both the inventory-theoretic model of the transactions demand for money and Tobin's portfolio model are commonly called Neo-Keynesian models. Why?
8. Why was the speculative demand for money so controversial?
What happens to the velocity of money when idle balances increase?
7. Why is the speculative demand for money a demand for idle balances?
6. Both the precautionary and the speculative motives for holding money arise from the existence of uncertainty — uncertainty about what in each case?
5. Why is the Cambridge k more likely to change than is V in the Quantity Theory?
4. How is the interpretation of the Quantity Theory equation affected by the assumption of endogenous money?
3. Given the various points mentioned in Box 5.1 as influencing the velocityof money, would you expect the long-term velocity of money to have increased or decreased over the past fifty years?130
2. Why is the Quantity Theory of Money not a theory of the demand for money? What is it a theory of?
1. Economics generally tells us that one must analyse the factors influencing both the demand for and supply of important variables. Why, then, might the demand for money not be of great importance
When interest rate rises, is it the income or the substitution effect that causes the demand for money to fall? Why?
(vi) Once it is accepted that some people but not others make money/bonds/money conversions with transactions balances, aggregation problems arise. It can then be shown that almost any elasticity is
(v) Individuals can be allowed to save part of their income, acquiring interest-bearing assets for holding long-term as well as for short-term reasons.
(iv) The transactions demand for money may be modelled such that money holdings are only deliberately adjusted when they reach upper or lower thresholds.
(iii) Only the interest rate on bonds is included in the model; but if a firm can use an overdraft facility to obtain money, the relevant rate is the difference between the rate charged on borrowings
(ii) The frequency of pay periods and the timing of payments may be influenced by institutional and technical changes (for example, the use of credit cards) and by economic factors such as high and
(i) With fixed or partly fixed transactions costs, a person does not hold securities at all unless the interest income is greater than the transactions costs of converting money into and out of
(e) people, who used to receive their salaries once a week in cash are now paid monthly directly into their bank accounts?
(d) instead of buying fresh food daily from their local markets, people buy frozen food in major shopping expeditions once a month?
(c) many people who used to pay gas, electricity and telephone bills each quarter, now do so by monthly direct debit payments?
(b) there is a wave of mergers among firms leading to greater vertical integration of industry?
(a) people start to make much greater use of credit cards?
(d) This follows on from the second part of (b) — the frequency of payment. The greater availability of credit allows exchange to occur but payment to be postponed.Now answer the following
(c) Some transactions occur for which money is not needed because they take place within a firm — the firm is vertically integrated. The exchange is recorded in the separate books of the various
(b) Given the possibility of moving from money to income-earning assets and back, the amount of money people need to hold on average is influenced by the frequency with which they undertake
(a) We assume people receive income in the form of money — either cash or direct payments into a sight deposit at a bank. Much depends on what alternatives are available for the holding of wealth
We wish to know how much money people need to hold on average over a period in order to finance the exchange of a given quantity of goods and services. The more money they need to hold, the lower
(d) the extent to which credit is used.
(c) the degree of vertical integration of industry; and
(b) expenditure patterns and the timing of payments;
(a) the frequency with which income is received;
Friedman's approach to the demand for money, its relationship to the Quantity Theory and its implications for monetary policy
Tobin's development of the portfolio model of the demand for money
The development of theories of the precautionary demand for money
The way in which interest rates were incorporated into the theory of the transactions demand for money
The monetary policy implications of Keynes’s theory
A consideration of Keynes's motives approach to the demand for money and the criticisms of it
The movement from the Quantity Theory to the first theories of the demand for money
The implications for economic policy of the Quantity Theory of Money
(b) any changes in the Bank’s repo rate over that same period.
6. Go to the statistical section of the Bank of England’s website(www.bankofengland.co.uk/mfsd/) and make a note of (a) the rate of money growth in each of the last four quarters for which figures
5. Explain what is meant by a repurchase agreement and work an example to show how, by changing the terms of a repo deal, the central bank can raise and lower short-term interest rates.
4. Why is the demand for reserves by commercial banks highly interestinelastic?MONEY SUPPLY AND CONTROL IN THE UK 93 lending ceilings qualitative guidance direct controls repurchaseagreements
3. Explain briefly the disadvantages of attempting to regulate monetary growth by non-price methods.
2. Why, in practice, are commercial banks unconstrained in their access to reserves?
1. Distinguish between ‘interest-endogeneity’ and ‘base-endogeneity’.
How the endogeneity of money affects our understanding of a range of issues in monetary economics
Why this choice effectively makes the money stock endogenous
Why they have chosen to target short-term interest rates rather than the money stock
Why central banks are in a position to exert considerable influence over shortterm interest rates
6. Why, according to the flow of funds approach, does the choice of exchange rate regime make monetary control more, or less, difficult for the authorities?

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