Chapter 20: Q 11. (page 547)
In Keynes’s analysis of the speculative demand for money, what will happen to demand for money if people suddenly expect that the normal level of the interest rate has fallen? Explain your answer.
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Why might a central bank choose to monetize the debt, knowing that it could lead to higher inflation?
Wikipedia has a detailed account of hyperinflationary episodes in a number of countries throughout history. Go to the page at https://en.wikipedia.org/wiki/ Hyperinflation#Notable_hyperinflationary_episodes. Which of the countries listed had the worst hyperinflationary episode? Which country has the most recent hyperinflationary episode?
Suppose that a plot of the values of M2 and nominal GDP for a given country over years shows that these two variables are very closely related. In particular, a plot of their ratio (nominal GDP/M2) yields very stable and easy-to-predict values. On the basis of this evidence, would you recommend that the monetary authorities of this country conduct monetary policy by focusing mostly on the money supply rather than on setting interest rates? Explain.
Consider two central banks: one with a history of maintaining price stability and low inflation, and the other with a history of high inflation and poor inflation management. All else equal, if the same level of government budget deficit is monetized in both countries, how is inflation likely to behave in each country?
Explain why the aggregate demand curve slopes downward and the short-run aggregate supply curve slopes upward.
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