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University of Regina Department of Economics ECON 231: Money, Banks & Financial Institutions Winter 2014 Assignment 1 (150 Points) Due Date:...

As much as possible, use graphs and equations to drive home your points! That’s the best way to learn economics!

7. Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets? Does this argument make sense? Explain.

8. (10 points) Suppose the Bank of Canada announces that it will raise the money supply in the future but does not change the money supply today. Using the Fisher equation, explain what happens to the nominal interest rate.

9. (10 points) Can the Bank of Canada directly increase or decrease the money supply at will? Explain critically.

10. (15 points) The more risk averse people are, the more likely they are to diversify. Is this statement true, false or uncertain? Critically explain your answer using the expected utility framework. (Hint: Graphs will be very helpful in your analysis).

11. (10 points) Describe what is meant by the liquidity trap. Discuss the problems posed by the liquidity trap and the optimal ways to escape from it.
12. (15 points) Critically explain why interest rates are pro-cyclical, using the supply and demand for bonds framework.
1 University of Regina Department of Economics ECON 231: Money, Banks & Financial Institutions Winter 2014 Assignment 1 (150 Points) Due Date: Wednesday, January 29, 2014 at 7:00 pm in class Note: You should select your words carefully. Your answers should be as clear and concise as possible. Long answers do not necessarily guarantee handsome rewards. As much as possible, use graphs and equations to drive home your points! That s the best way to learn economics! 1. (10 points) If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1+ money supply, M2+ money supply, both, or neither? Explain. 2. (10 points) How should we count a $50 bill stuffed in your sofa? Can it be regarded as a component of M2 (gross)? 3. Consider the following: i. Currency outside banks: $3,000 ii. Personal deposits at chartered banks: $39,000 iii. Non-personal demand and notice deposits at chartered banks: $36,000 iv. Deposits at other financial institutions (trust and mortgage loan companies, credit unions and caisses populaires, government-owned saving institutions, money market mutual funds and life insurance company individual annuities): $18,000 v. Non-personal term and foreign currency deposits: $27,000 Find: a) (10 points) M2 (gross) b) (10 points) M3 (gross) c) (10 points) M2+ (gross) (Hint: Assume adjustments to the various aggregates are zero). 4. (10 points) Why do financial crises occur and why are they so damaging to the economy? 5. (10 points) Explain, using the best framework you can think of (based on our class discussion), the effect of a large federal deficit on interest rates. 6. (10 points) Briefly explain the dynamics of the 2007 financial crisis in terms of adverse selection and moral hazard. 7. (10 points) Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets? Does this argument make sense? Explain.
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2 8. (10 points) Suppose the Bank of Canada announces that it will raise the money supply in the future but does not change the money supply today. Using the Fisher equation, explain what happens to the nominal interest rate. 9. (10 points) Can the Bank of Canada directly increase or decrease the money supply at will? Explain critically. 10. (15 points) The more risk averse people are, the more likely they are to diversify. Is this statement true, false or uncertain? Critically explain your answer using the expected utility framework. (Hint: Graphs will be very helpful in your analysis). 11. (10 points) Describe what is meant by the liquidity trap. Discuss the problems posed by the liquidity trap and the optimal ways to escape from it. 12. (15 points) Critically explain why interest rates are pro-cyclical, using the supply and demand for bonds framework. (Note 2: While I encourage group learning, the solutions to the assignments that you submit must be your own independent work. Identical works will be considered scholastic dishonesty, will be given a grade of zero and will be reported to the Associate Dean of Arts for academic misconduct). 2 8. (10 points) Suppose the Bank of Canada announces that it will raise the money supply in the future but does not change the money supply today. Using the Fisher equation, explain what happens to the nominal interest rate. 9. (10 points) Can the Bank of Canada directly increase or decrease the money supply at will? Explain critically. 10. (15 points) The more risk averse people are, the more likely they are to diversify. Is this statement true, false or uncertain? Critically explain your answer using the expected utility framework. (Hint: Graphs will be very helpful in your analysis). 11. (10 points) Describe what is meant by the liquidity trap. Discuss the problems posed by the liquidity trap and the optimal ways to escape from it. 12. (15 points) Critically explain why interest rates are pro-cyclical, using the supply and demand for bonds framework. (Note 2: While I encourage group learning, the solutions to the assignments that you submit must be your own independent work. Identical works will be considered scholastic dishonesty, will be given a grade of zero and will be reported to the Associate Dean of Arts for academic misconduct).
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7. Some economists suspect that one of the reasons that economies in developing countries
grow so slowly is that they do not have well-developed financial markets? Does this
argument make sense?...

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