Problem 1
Equal annual payments in nominal terms become declining annual payments in real terms.Does this explain why voters mind high inflation even when nominal interest rates rise in line with inflation?
Problem 3
Common fallacies Why are these statements wrong? (a) Getting inflation down is the only way to cure high unemployment. (b) Inflation stops people from saving. (c) Inflation stops people from investing.
Problem 4
Which of the following statements is correct? (a) The long-run Phillips curve should really have a positive slope because higher inflation makes firms substitute away from workers who are causing the underlying problem. (b) If inflation leads people to economize on some forms of money, this must makethe economy less productive and probably raises long-run unemployment. (c) When other thingsare assumed to be equal, it is a tolerable approximation to view the long-run Phillips curve asvertical.
Problem 5
Name three groups which lose out during inflation. Does it matter whether this inflation was anticipated?
Problem 6
(a) Explain the following data taken from The Economist a few years ago (when some countries still had proper inflation!). (b) Is inflation always a monetary phenomenon? $$ \begin{array}{|l|c|c|} \hline & \text { Money growth (\%) } & \text { Inflation (\%) } \\ \hline \text { Eurozone } & 3 & 2 \\ \hline \text { Japan } & 12 & -3 \\ \hline \text { UK } & 6 & 2 \\ \hline \text { Australia } & 15 & 3 \\ \hline \text { US } & 8 & 2 \\ \hline \end{array} $$
Problem 7
Professor Milton Friedman argued that money was socially useful but essentially free to create. Society should therefore reduce the opportunity cost of holding money to zero, so that people would demand it up to the point at which its marginal benefit was zero. (a) Suppose the real interest rate on other assets is around 3 per cent. Is there any way society could arrange for cash to earn a similar real return? (b) Why don't governments do this?
Problem 9
Inflation in Zimbabwe, high for many years, reached hyperinflation levels in the recent past. (a) President Mugabe blamed Western governments for restricting trade and driving up prices. Could a fall in supply have generated sustained high inflation? (b) Why do you think Zimbabwe has such high inflation? (c) Is inflation high enough to raise the maximum possible revenue for the government?
Problem 10
Suppose \(D\) is real government debt, \(s\) the primary budget surplus \(T-G\) (that is, excluding interest payments on debt), \(i\) the real interest rate, \(Y\) real output and \(g\) the rate of output growth. The debt burden \(D / Y\) rises with debt but falls with output and the ability to repay debt. Let \(\Delta\) denote the increase in a variable. (a) If \(\Delta(D / Y)=(\Delta D / D)-(\Delta Y / Y)\), show that the debt \(/\) GDP ratio shrinks only if \(s / D>i-\) g. (b) Suppose all debt is cash, paying no interest. Show that the above relationship becomes \(s / D>(g+\pi)\).
Problem 12
Draw a curve to illustrate how the real revenue raised by the government through foreseen inflation varies with the inflation rate. If an economy moves from using a lot of cash to using a lot of electronic money on which market interest rates are paid, illustrate how the curve changes.
Problem 14
Essay questionDoes the huge success of central bank independence in so many countries suggest that other decisions should be removed from government? Your answer should include assessments of the case for (a) an independent health services board, (b) an independent budget deficit commission, and (c) a redistribution commission.
