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If the nominal interest rate on money is the same as the nominal interest rate on bonds, determine the effects in the model, illustrating this in a diagram.
How can bank runs be prevented? Explain what moral hazard is and why and how deposit insurance and the too-big-to-fail doctrine induce a moral hazard problem.
Why are there two equilibria in the Diamond-Dybvig banking model? How do the two equilibria compare?
What are the four defining characteristics of a financial intermediary? What are three types of financial intermediaries?
Why don't real-world central banks follow the Friedman rule? List four properties of assets, and explain why these properties are important.
How does an absence of double coincidence of wants make money socially useful?
What are five forms that money has taken historically? What is different about these two forms of money?
Under a flexible exchange rate, what are the equilibrium effects? Should economic policy respond to the change in future productivity? If so, how?
Suppose that capital controls take the form of a total ban on capital inflows. Carefully explain how and why your results differ in the two cases.
There is also a liquidity trap at the world level, in that r* = 0. Is there anything that economic policy can do to close the output gap? If so, what? Explain.
Why should the federal minimum wage be raised? Should the current federal income tax be lowered to reduce unemployment?
In the Diamond-Dybvig banking model, suppose that the banking contract. Why will there still be a bank run equilibrium? Carefully explain why or why not.
Determine a consumer's lifetime budget constraint when there is no bank, show this in a diagram, and determine the consumer's optimal consumption.
How did the Phillips curve get its name? The Phillips curve relationship examined in this chapter is a positive relationship between what two variables?
Explain how the Friedman-Lucas money surprise model works. When real aggregate output is equal to trend output, what is the inflation rate equal to?
What is the effect of an increase in expected inflation on the Phillips curve? What causes a change in the slope of the Phillips curve?
Can the Fed permanently increase the level of aggregate output? Why is the inflation rate high in the long run if the central bank cannot commit itself?
What is a naive forecast of inflation? How do we know that the Phillips curve does not help in forecasting inflation?
That is, the private sector's expected inflation rate is what the inflation rate was last period.
Suppose that the private sector believes the central bank announcement. What are the effects on the inflation rate and real output?
Plot the inflation rate for 1970-1990, and the percentage growth rate in real GDP over the same period.
Do you observe a Phillips curve relation in the data? What if you confine attention to particular sub-periods? Discuss.
What causes deficient financial liquidity? Which is the better macro model, the real business cycle model or the coordination failure model? Explain.
Describe an example of a coordination failure problem. What causes business cycles in the coordination failure model?
Should the government act to stabilize output in the real business cycle model? What are the important shortcomings of the real business cycle model?