probset3_w2010 - Econ 22 Problem set 3 due Monday Feb 16 1...

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Econ 22 Winter 2010 Problem set # 3 due Monday Feb 16 Professor Rose 1. Money, Prices, and Interest rates a. The Fed has significantly increased the monetary growth rate in the past two years to combat the crisis. A number of economists believe that the tension caused by having to finance persistent large fiscal deficits in the coming years may lead to a permanently higher rate of monetary growth. 1. Using the appropriate graphs and models, describe the traditional tools the central bank would use to pursue this policy. 2. Using the graphical model of money market equilibrium presented in class, show the effects in the long run of this policy on: real money balances, inflation, nominal interest rates, real interest rates, savings and investment. b. Hyperinflation 1. Briefly describe the causes of hyperinflation and the solution to ending a hyperinflation. 2. Show graphically and explain the behavior of money, the price level, inflation nominal interest rates and real money balances during a hyperinflation 3.. Calculate the annual inflation rate if the monthly rate is 1.5 percent vs. 50 percent.
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