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How does a confidence shock differ from the idea of confidence as an amplifier?
In a complete model where there were three injections (I, G and X), and three withdrawals (S, T and M), what else would determine the shape of the ‘JW’ curve?
Assume that the government cuts its expenditure and thereby runs a public-sector surplus.
\r\n(a) What will this do initially to equilibrium national income?
\r\n(b) What will it do to the demand for money and initially to interest rates?
\r\n(c) Under what circumstances will it lead to (i) a decrease in money supply; (ii) no change in money supply?
\r\n(d) What effect will (i) and (ii) have on the rate of interest compared with its original level?
Redraw the three diagrams of Figure 19.2 with a steeper L curve. Show how an increase in money supply will have a greater effect on national income.
Do you think that this is an accurate description of how people behave when they acquire extra money?
If importers and exporters believe that the exchange rate has ‘bottomed out’, what will they do?
Figure 19.5 shows a steep investment demand curve. If the real rate of interest falls from r1 to r2, there is only a small rise in investment from I1 to I2. Now draw a much more elastic I curve passing through point a. Assume that this is the true I curve. Show how the rate of interest could still fall to r2 and investment still only rise to I2 if this curve were to shift.
How might we go about assessing whether quantitative easing actually worked?
What is the opportunity cost of holding money? Is it the real or the nominal rate of interest? Explain.
1. If V is constant, will (a) a £10 million rise in M give a £10 million rise in MV; (b) a 10 per cent rise in M give a 10 per cent rise in MV ? (Test your answer by fitting some numbers to the terms.)
\r\n2. If both V and Y are constant, will (a) a £10 million rise in M lead to a £10 million rise in P; (b) a 10 per cent rise in M lead to a 10 per cent rise in P? (Again, try fitting some numbers to the terms.)
Trace through the effects on the foreign exchange market of a fall in the money supply.
What patterns in interest rates emerged following the financial crisis?
\r\n
Which way is the L2 curve likely to shift in the following cases?
\r\n(a) The balance of trade moves into deficit.
\r\n(b) People anticipate that foreign interest rates are likely to rise relative to domestic ones.
\r\n(c) The domestic rate of inflation falls below that of other major trading countries.
\r\n(d) People believe that the pound is about to depreciate.
\r\n
Would the demand for securities be low if their price was high, but was expected to go on rising?
Buying something like a car is at the other end of the spectrum from holding cash. A car is highly illiquid, but yields a high return to the owner. In what form is this ‘return’?
Will students in receipt of a loan, grant or an allowance who receive the money once per term have a high or a low transactions demand for money relative to their income?
What effects do debit cards and cash machines (ATMs) have on
\r\n(a) banks’ prudent liquidity ratios;
\r\n(b) the size of the bank deposits multiplier?
If the government borrows but does not spend the proceeds, what effect will this have on the money supply if it borrows from
\r\n(a) the banking sector;
\r\n(b) the non-bank private sector?
Which would you expect to fluctuate more: the money multiplier (DM4/Dcash), or the simple ratio, M4/cash, illustrated in Figure 18.4?
Is the following statement true: ‘The greater the number of types of assets that are counted as being liquid, the smaller will be the bank deposits multiplier’?
How will an increased mobility of savings and other capital between institutions affect this argument?
If banks choose to operate a 20 per cent liquidity ratio and receive extra cash deposits of £10 million:
\r\n(a) how much credit will ultimately be created?
\r\n(b) by how much will total deposits have expanded?
\r\n(c) what is the size of the bank deposits multiplier?
Why should Bank of England determination of the rate of interest in the discount and repo markets also influence rates of interest in the parallel markets?
How might the development of new financial instruments affect a central bank’s conduct of monetary policy?
1. Would it be possible for an economy to function without a central bank?
\r\n2. What effect would a substantial increase in the sale of government bonds and Treasury bills have on interest rates?
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