3. Comment on the following statements below. Be sure to state whether you agree or disagree with the statement in question and explain why you do so. a. "The introduction of the Official Cash Rate System in NZ has led to a dramatic increase in the variability of domestic market interest rates. As a result, empirical support for the expectations hypothesis of the term structure of interest rates in NZ has decreased substantially." b. "Raising the official cash rate leaves a trading bank's demand for reserves unaffected. That's because leaving the width of the channel unchanged has no bearing on the trading bank's demand for reserves function." c. "One of the great insights from the Diamond-Dybvig model is that the provision of the optimal demand deposit contract rules out the occurrence of bank runs." d. "In the Bernanke and Blinder Model of the bank-lending channel of monetary policy, bank loans are not special. Bank loans are simply a mechanism whereby banks earn revenue and they are perfect substitutes for bonds on the asset side of the balance sheet of a bank." e. "According to the risk channel of monetary policy, in a low-interest rate environment banks cut back on monitoring their loan portfolios. This is tantamount to an increase in the riskiness of the loan portfolio, as the probability of borrowers not repaying their loans increases." f. "Schularick and Taylor identify two distinct eras of finance capitalism during which the relationship between credit and money changed dramatically. In the pre-WWII era (excluding the Great Depression years), the relationship between money and credit was highly unstable and marked by an upward trend of the credit to money ratio. In sharp contrast, in the post-WWII era the relationship between money and credit was very stable and unchanging." g. "Micro-prudential regulation guarantees the overall health of the economy. Shrinking balance sheets of capital-constrained banks have no adverse macroeconomic consequences." h. "Tobin's theory of investment is exceedingly simple: an increase in the money supply 9 leads to an increase in the required return on capital, which in turn stimulates economic activity." 132 noints) 3. Comment on the following statements below. Be sure to state whether you agree or disagree with the statement in question and explain why you do so. a. "The introduction of the Official Cash Rate System in NZ has led to a dramatic increase in the variability of domestic market interest rates. As a result, empirical support for the expectations hypothesis of the term structure of interest rates in NZ has decreased substantially." b. "Raising the official cash rate leaves a trading bank's demand for reserves unaffected. That's because leaving the width of the channel unchanged has no bearing on the trading bank's demand for reserves function." c. "One of the great insights from the Diamond-Dybvig model is that the provision of the optimal demand deposit contract rules out the occurrence of bank runs." d. "In the Bernanke and Blinder Model of the bank-lending channel of monetary policy, bank loans are not special. Bank loans are simply a mechanism whereby banks earn revenue and they are perfect substitutes for bonds on the asset side of the balance sheet of a bank." e. "According to the risk channel of monetary policy, in a low-interest rate environment banks cut back on monitoring their loan portfolios. This is tantamount to an increase in the riskiness of the loan portfolio, as the probability of borrowers not repaying their loans increases." f. "Schularick and Taylor identify two distinct eras of finance capitalism during which the relationship between credit and money changed dramatically. In the pre-WWII era (excluding the Great Depression years), the relationship between money and credit was highly unstable and marked by an upward trend of the credit to money ratio. In sharp contrast, in the post-WWII era the relationship between money and credit was very stable and unchanging." g. "Micro-prudential regulation guarantees the overall health of the economy. Shrinking balance sheets of capital-constrained banks have no adverse macroeconomic consequences." h. "Tobin's theory of investment is exceedingly simple: an increase in the money supply 9 leads to an increase in the required return on capital, which in turn stimulates economic activity." 132 noints)