7. Some economic historians have noted that during the period of the gold standard, gold discoveries were
Question:
7. Some economic historians have noted that during the period of the gold standard, gold discoveries were most likely to occur after a long deflation. (The discoveries of 1896 are an example.) Why might this be true?
8. Suppose that consumption depends on the level of real money balances (on the grounds that real money balances are part of wealth). Show that if real money balances depend on the nominal interest rate, then an increase in the rate of money growth affects consumption, investment, and the real interest rate. Does the nominal interest rate adjust more than one-for-one or less than onefor-one to expected inflation?
This deviation from the classical dichotomy and the Fisher effect is called the “Mundell–Tobin effect.” How might you decide whether the Mundell–Tobin effect is important in practice?
Step by Step Answer: