Assignment
The answers to these exercises can be found in Friedman and Schwartz (1963) A Monetary History of the United States, Chapter 7, entitled, "The Great Contraction"; the Barro textbook Chapters 4 and 18 but especially Chapters 7, 8, and 17; the article by Richard D. Porter, "The Location of U.S. Currency: How Much is Abroad?"; and Sargent Rational Expectations and Inflation (either the 1st or 2nd edition), Chapter 3, entitled "The Ends of Four Big Inflations", and Chapter 5, entitled, "Some Unpleasant Monetarist Arithmetic".
1. What was the path of the money stock in the U.S. from January 1929 to March 1933? How did household's holdings of currency change over the same period?
2. What was the path of real income in the U.S. from January 1929 to March 1933? How did prices change over the same period?
3. In the period 1948-1991 have American real interest rates ever been negative? In the same period, has the U.S. inflation rate ever been negative? If so, when?
4. What is the evidence that inflation, in Milton Friedman's words, "is always and everywhere a monetary phenomenon"? In the long run? In the short run?
5. If you take the population of the U.S. to be 260 millions, roughly how many dollars of currency were in circulation for every U.S. citizen at the end of 1995? How much currency are you carrying right now? How do you account for this discrepancy?
6. Why do people hold currency and keep part of their wealth in low interest bearing accounts (like the Hyde Park Bank's zero interest checking account)?
7. Explain how a rational expectations view of agent's behavior (as defined by Sargent) can explain why inflation seems to have momentum, while in fact it does not.
8. What is seignorage? How much money did the U.S. raise via seignorage in 1991?
9. What is the Quantity Theory of Money? Explain the sense in which it is "just" an accounting identity.
10. What is a gold standard? True or false: Under a gold standard the quantity of money is fixed.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.