Problem 2
Which of these statements is correct? The purpose of quantitative easing is: (a) to create money in order to create inflation and reduce the real value of government debt; (b) to force banks to create deposits despite having inadequate bank reserves; (c) to make the central bank the purchaser of last resort for government bond issues; (d) to prevent a collapse of broad money when banks are unable or unwilling to lend.
Problem 3
What are the desirable properties of a good leading indicator for interest rate decisions?
Problem 4
What happens to the consumption function if the banks decide to offer credit cards on easier terms and conditions? Why?
Problem 5
Common fallaciesWhy are these statements wrong? (a) By abolishing reserve requirements, the central bank gave up any attempt to control the money supply. (b) When real interest rates are negative, people are being paid to hold cash. (c) Consumers are said to behave irrationally if their spending is up when their disposable income is lower.
Problem 8
Suppose banks begin lending again as confidence is restored. (a) If monetary policy takes no action, what will be the likely outcome? (b) What action by the central bank would then be appropriate?
Problem 9
Why might it take up to two years for a change in interest rates fully to affect aggregate demand? What does this imply about decisions to set interest rates?
Problem 10
If the permanent income hypothesis is correct, we should expect to see a lower marginal propensity to consume in the short run than in the long run. Why?
Problem 13
Essay question Why do modern central banks think of monetary policy as choosing the interest rate rather than the money supply?
