Economics Questions-
(1) The Federal Reserve System. Determine whether each of the following statements is True or False and explain why (simply answering "true" or "false" need an explanation for each one).
i. "The role of the Fed is to control the supply of money in the economy."
ii. "In order for a bank to make a loan, they must have excess reserves available."
iii. "The primary reason that the Fed was created was to have an institution that could conduct open market operations (for example, to stimulate investment spending by lowering interest rates)."
iv. "Before the Fed, we had the National Banking System, which was a system that allowed for an "elastic" money supply."
(2) Endogenous vs. Exogenous Money. Explain why the supply of money may be considered an "endogenous" variable, rather than an "exogenous variable." Does the "textbook view" treat money as endogenous or exogenous?
(3) Monetary Transmission Mechanisms. We discussed two "credit view" channels of the monetary transmission mechanism: the "bank lending channel" and the "balance sheet channel." (i) Explain how each of these channels are supposed to work (i.e., how changes in monetary policy lead to changes in output) and (ii) discuss whether the bank lending channel is consistent with your answer to question (2) above.
(4) Monetary Systems. Suppose your roommate tells you that "all of our economic problems would be solved if the U.S. would just go back on the gold standard." Discuss the extent to which you agree or disagree with your roommate and why.
(5) Burgernomics. In 1986, The Economist magazine introduced the "Big Mac Index" in an effort to "make exchange-rate theory a bit more digestible." Since a Big Mac is identical in every country, the theory of purchasing power parity (PPP) would suggest that the relative prices of Big Macs could be used to determine whether the exchange rate between currencies is at their "correct" level. You can find the updated Big Mac Index and more information at the following: https://www.economist.com/content/big-mac-index
a. Using your knowledge of PPP and the exchange rates given in Table 1, construct the Big Mac Index by filling in the values in Table 2.
Table 1: Exchange Rates
|
Country
|
Currency
|
Quote
|
|
U.K.
|
Pound (GBP)
|
GBP/USD = 1.425
|
|
Japan
|
Yen (JPY)
|
USD/JPY = 106.940
|
|
China
|
Renminbi (CNY)
|
USD/CNY = 6.563
|
|
India
|
Rupee (INR)
|
USD/INR = 66.966
|
|
Switzerland
|
Franc (CHF)
|
USD/CHF = 0.964
|
Table 2 can interpreted as follows
i. Column (i) of Table 2 gives the price of a Big Mac in each country (in the local currency); in other words, this is the price that you would see on the menu in the respective countries.
ii. To complete column (ii), enter the exchange rate for each country's currency in terms of dollars (i.e., the number of dollars that it takes to purchase one unit of the country's currency).
iii. To complete column (iii), find the local price of a Big Mac in U.S. dollars (use columns (i) and (ii)).
iv. Column (iv) will give the "Big Mac Index," using U.S. dollars as the base currency. For each country, calculate the exchange rate implied by PPP (the foreign price [in U.S. $s] divided by the domestic (U.S.) price); this gives you the Big Mac Index.
v. In column (v), state whether the currency is undervalued or overvalued (Hint: compare your results from column (iv) with what the theory of PPP says the real exchange rate should be).
vi. In column (vi) determine by what percent the currency is overvalued or undervalued (again, compare your results in column (iv) with what PPP says it should be).
Table 2: The Big Mac Index
|
Country
|
(i)
Price in lo- cal currency
|
(ii)
Exchange rate (in $s)
|
(iii)
Price of Big Mac (in $s)
|
(iv)
Big Mac Index
|
(v)
Overvalued/ Undervalued
|
(vi)
% Over/ Un- dervalued
|
|
U.S.
|
$ 4.90
|
1
|
$ 4.90
|
1
|
N/A
|
N/A
|
|
U.K.
|
£ 2.89
|
|
|
|
|
|
|
Japan
|
Y 370
|
|
|
|
|
|
|
China
|
RMB 17.60
|
|
|
|
|
|
|
India
|
Rupee 127.00
|
|
|
|
|
|
|
Switzerland
|
SFr 6.50
|
|
|
|
|
|
b. Based on your results in part (a), which currency listed in Table 2 is the most undervalued? Which is the most overvalued?
c. In 200 words or less, explain the theory of Purchasing Power Parity to someone with no training in economics. In your answer, identify some of the reasons that PPP might fail and briefly comment on the validity of using hamburgers (or any comparable good) to determine the relative price of currencies.
(6) International Monetary Regimes. For the past six years, Greece has faced double-digit unemployment rates with few signs of any meaningful improvement (Greece is a Eurozone member country, meaning they share the euro currency). Suppose that a newly elected prime minister of Greece has suggested that Greece abandon the Euro, issue their own currency (the Drachma), and use independent monetary policy to stabilize the economy and restore employment. However, since Greece wants to maintain stable exchange rates, they would peg the value of the drachma to the U.S. dollar.1 Additionally, the Greek government is committed to a policy of free capital movement into and out of the Greek financial markets. In 200 words or less, comment on the validity of this proposal and suggest any changes that you would make (be sure to consider whether all of the proposed policies can be in effect simultaneously).