1 Money Concepts (5 pts) Please type your answers to the questions in this section. Also noie that you may need to refer to the textbook when answering some of these questions. Questions: (a) Describe in your own words the difference between real and nominal interest rates. (b) What are some advantages and disadvantages of having a fiat currency as opposed to a currency backed by some specific commodity? In particular, how does this change the kinds of policy which a government can enact? () We don't usually think of physical cash as a savings vehicle, but in some ways a dollar bill resembles a bond. They're both certificates that can be redeemed for dollars. A dollar bill is a certificate from the government that costs exactly one dollar, and can be redeemed at any time for exactly one dollar. What is the nominal return on holding a dollar bill7 What is the real return? (d) Explain what happens in a liguidity trap. (see chapter 12) {e) Give an example of a policy that a government can use to control the money supply in a liquidity trap. The Liquidity Trap Typically thought that the nominal interest rate cannot go below zero (though in practice, not quite correct). - There is a zero lower bound on the nominal interest rate. At the zero lower bound, money M and B become perfect substitutes. - Liquidity trap: Open market purchases of B by the central bank will not matter