Chapter 1: Q.4 (page 66)
Explain the link between well-performing financial markets and economic growth. Name one channel through which financial markets might affect economic growth and poverty
Spillover effect the economic growth and poverty of a nation
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What effect might a fall in stock prices have on business investment?
When there is an increase in the value of the European Union’s euro, all else equal, how will American businesses be affected? What will happen when there is a decrease in the value of the American dollar relative to the Japanese yen, given all else is equal?
Go to the St. Louis Federal Reserve FRED database and find data on the M1 money supply (M1SL) and the 10-year treasury bond rate (GS10). Add the two series into a single graph by using the “Add Data Series” feature. Transform the M1 money supply variable into the M1 growth rate by adjusting the units for the M1 money supply to “Percent Change from Year Ago.”
a. In general, how have the growth rate of the M1 money supply and the 10-year treasury bond rate behaved during recessions and during expansionary periods since the year 2000?
b. In general, is there an obvious, stable relationship between money growth and the 10-year interest rate since the year 2000?
c. Compare the money growth rate and the 10-year interest rate for the most recent month available to the rates for January 2000. How do the rates compare?
Can you think of a reason why people in general do not lend money to one another to buy a house or a car? How would your answer explain the existence of banks?
If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to
a. real output?
b. the inflation rate?
c. interest rates?
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