Questions on Monetarism: For extra credit to make up for any missing weekly HWs. Also, if attmepted, extra weighted ponits will be credited to those who have already submitted all required weekly HWs.
Answer any 5 out of following questions and post in Assignment page designated as WK13A.
1) What policy rule do monetarists believe the Fed should follow? What are the major assumptions underlying this policy prescription?
2) What average annual inflation rate would a monetarist expect if the Fed maintained a growth rate of M2 = 10% per year for a three year period? (Assume that the monetarist felt that the long run average growth rate of RGDP was 3%)
3) Why would you expect the velocity of circulation of a monetary aggregate such as M1 or M2 to rise during periods of high interest rates and to decline during periods of low interest rates?
4) Suppose that long term interest rates in the economy were increasing due to strong economic growth and demand for loans in the world economy. Meanwhile suppose that the Fed was holding down its federal funds rate target. What would probably be happening to M2 velocity? Explain your answer.
5) Why might M1 and M2 grow at very different rates during a given year?
6) Those who advocate that the Fed target monetary aggregates, usually argue that the Fed should not alter its monetary targets in response to temporary changes in macroeconomic conditions, yet those who advocate interest rate targeting never recommend that the Fed maintain a constant federal funds rate target. Why not? (What's the potential danger of maintaining a rigid interest rate target?)
7) If excessively rapid growth in the money supply is associated with all inflationary episodes, why do central banks ever allow the money supply to increase so rapidly?