International Finance

As an economist for a major bank, you are asked to explain a substantial increase in the price level when neither the money supply nor the velocity of money has increased. How can this occur?

1. As an advisor to the United States Treasury you have been asked to comment on a proposal for easing the burden of interest on the national debt. This proposal calls for the elimination of federal taxes on interest received from Treasury debt obligations. Comment on the proposal.
2. Assume a condition in which the economy is strong, with relatively high employment. For one reason or another, the money supply is increasing at a high rate, with little evidence of money creation slowing down. Assuming the money supply continues to increase, describe the evolving effect on price levels.
3. Assume you are employed as an investment advisor. You are working with a retired individual who depends on her income from her investments to meet her day-to-day expenditures. She would like to find a way of increasing the current income from her investments. A new high-yield or junk bond issue has come to your attention. If you sell these high-yield bonds to a client, you will earn a higher-than-average fee. You wonder whether this would be a win-win investment for your retired client, who is seeking higher current income, and for you, who would benefit in terms of increased fees. What would you do?