1 Money Concepts (5 pts) Please type your answers to the questions in this section. Also note that you may need to refer to the textbook when answering some of these questions. Questions: (a) Deseribe 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 bill? What is the real return? (d) Explain what happens in a liquidity 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. 2 Comparing Monetary Policy under different assumptions. (5 pts) For PPart 2 of this assignment, compare the effects of the same shock in different version of the model. Questions: ([): Suppose we have a closed economy model with neutral money. (chl2) The monetary agency increases the money supply. sketch the effects of this shock. i N P NN (e Give an example of a pol money supply in a liquidity trap. 2 Comparing Monetary Policy under different assumptions. (5 pts) For Part 2 of this assignment, compare the effects of the same shock in different version of the model. Questions: (f): Suppose we have a closed economy model with neutral money. (ch12) The monetary agency increases the money supply. sketch the effects of this shock. m (g): Suppose we have a Keynesian sticky prices model. (ch14) The interest rate is initially above the natural rate of interest. The monetary agency increases the money supply. sketch the effects of this shock. XX II (h): Qualitatively describe the differences between these different versions of the model