Question 4

1. a) Explain the Quantity Theory of Money (QTM). What determines the rate of inflation in this theory? Does empirical evidence support QTM?

2. b) During recessions, some firms default on their loans and fail to repay their debts. Explain how a rise in corporate delinquencies may increase bankruptcies in the banking sector, lead to lower corporate investment and deepen recessions.

   c) Insettingmonetarypolicies,somecentralbanksoperateaccordingtoaTaylorrule while others operate through inflation targeting. Which central bank is likely to respond more directly to the Covid-19 pandemic crisis? Explain.