Question 3 (45 points). Briefly answer the following questions:

1. Explain why a government that must run up a large national debt to finance extraordinary expenses over the next several years might choose to surrender the power of money creation to a central bank beyond government's control. (15 points)

2. What will happen to the demand for fiat money, the nominal interest rate and the real interest rate if the government tries to use inflation to default on the national debt in: (15 points) (a) every other year? Explain. (b) randomly selected years? Explain.

3. Should the government close insolvent banks? Why? If your answer is yes, what policy could help preventing the issue you raised to to justify your answer? Would your answer change if deposits are or are not insured? (15 points