CH4aSQ - Mankiw Chapter 4 Study Questions 1 A foreign exchange market is a market in which the currency of one country is traded for the currency

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Mankiw, Chapter 4 Study Questions 1. A foreign exchange market is a market in which the currency of one country is traded for the currency of another country. In the dollar-yen market, for example, Japense yen are exchanged for U.S. dollars. Sellers of yen are buyers of dollars, and buyers of yen are sellers of dollars. In the early months of this year the dollar lost value against the yen. In response, the Federal Reserve purchased dollars (and sold yen) in the open market to keep the dollar from losing even more value. Other things equal, what was the effect of this foreign exchange market intervention on the U.S. money supply? 2. Suppose that during the 1980s the average nominal interest rate on loans of a particular kind was 8% in the United States and 75% in Argentina. What is the most likely cause of this large difference in nominal interest rates? Explain. 3. In the 16th century, gold was the main kind of money in much of Western Europe. Spanish explorers discovered gold in South America and transported large quantities of gold back to Europe. What were the likely effects of this gold inflow? Explain. 4. Suppose the average rate of money growth is 5% per year in country A and 20% per year in country B. Other things equal, which country is likely to have the higher real money supply (M/P)? Explain. 5. Suppose that in the decade after the year 2000 inflation in the United States becomes more and more of a problem. A clever government official comes up with a policy to fight inflation and convinces the President and Congress to implement it. The official reasons that inflation is caused by money growth, so the way to bring inflation down is to reduce the money supply. The policy is to one day announce that from that point on all $20 and $50 dollar bills are worthless. The $1, $2, $5, $10, and $100 dollar bills would still have the same value. This policy would reduce the US money supply by about 5 percent. Over time the government would begin to
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This note was uploaded on 04/30/2008 for the course ECO 3307 taught by Professor Green during the Spring '08 term at Baylor.

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CH4aSQ - Mankiw Chapter 4 Study Questions 1 A foreign exchange market is a market in which the currency of one country is traded for the currency

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