1. In the preceding question, suppose the central bank uses open market operations to aim at the money supply. Discuss the case for it to allow borrowing from it by commercial
banks at the latter's initiative. Is the argument for such borrowing different from that usually offered for the lender-of-last-resort function of central banks? Discuss.
2. "In the context of the modern classical model, the rate of money growth is the sole determinant of the trend rate of in?ation, and the stance of ?scal policy is irrelevant to it." Discuss.
3. Discuss the analytical and empirical validity of the statement that the Pigou effect ensures that full-employment equilibrium exists if prices and wages are ?exible.
4. Suppose that the government wants to increase its expenditure g and has the options of ?nancing it by higher taxes, bond issues or increases in the monetary base. Further, when g is increased through bond or monetary ?nancing, the central bank can also undertake offsetting open-market operations. What combinations, if any, of ?nancing methods and open-market operations will allow the following goals to be met in the neoclassical model:
(i) no change in the price level;
(ii) no change in investment;
(iii) no change in P and investment.